Editors note: This article comes from Lanhubiji, author: Audrey Charmant, translated by HQ in the Blue Fox Notes community, and reproduced by Odaily with authorization.
Foreword: The author of this article, Audrey Charmant, believes that choosing assets with low correlation can help reduce the risk of a portfolio and increase risk-adjusted returns. If you combine cryptocurrencies and US stocks, you get a correlation close to 0, which is good for diversification.
After months of experimenting with my CryptoCurious portfolio, Ive come to the conclusion that if one wants to add significant diversification to a cryptocurrency portfolio, it wont do so by adding more cryptocurrencies to the portfolio. accomplish.
Nonetheless, it is important to have a sufficiently diversified portfolio of different cryptocurrencies as it will reduce the overall risk of the portfolio. In The Intelligent Investor, Benjamin Graham argues that having 10 to 30 stocks in a portfolio can provide adequate diversification.
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SP 500 is not correlated with cryptocurrencies
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Why is building correlation important in a portfolio?
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Figure 3: In the CryptoCurious portfolio, different types of investment returns (since November 2018) are highly correlated.
The CryptoCurious portfolio consists of 4 to 20 different crypto assets, and their investment returns are highly correlated (Figure 3).
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Figure 4: Correlation of returns between cryptocurrencies and traditional stock markets (since November 2018), close to zero.
Over the past 4 months, the SP 500 has a 98% correlation with the Nasdaq, as major technology companies belong to both indices. We live in a world where global assets are highly correlated.
If you combine the cryptocurrency market and the U.S. stock market, you get a correlation close to 0, which is very good for asset diversification.
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Figure 5: source：https://theses.ubn.ru.nl/bitstream/handle/123456789/4434/MTHEC_RU_Sjoerd_Klabbers_s4384458.pdf?sequence=1）
In terms of diversification, low correlation is better than high negative correlation. In fact, when owning two assets that are perfectly inversely correlated, say one gains 5% and the other loses 5%, this can cause the returns to eventually cancel each other out. When two asset returns are less correlated, both earn uncorrelated returns, with one asset having as little impact on the other as possible.
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Build a Mixed Portfolio
To benefit from low correlations, I construct a mixed portfolio consisting of 50% cryptocurrencies and 50% US stocks.
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Figure 6: Price evolution of a mixed portfolio with 50% performance from the SP 500 and 50% from the Top 20 Crypto Index.
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Adjust portfolio
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Figure 8: Price change for the hybrid portfolio (blue) after the monthly 24th adjustment.
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Figure 9
in conclusion
in conclusion
1. Having a diversified portfolio of different cryptocurrencies is very important as it will reduce the overall risk of the portfolio.
2. Selecting assets with low correlation will help reduce the risk of the portfolio and increase the risk-adjusted return.
3. If you combine cryptocurrencies and US stocks, you will get a correlation close to 0, which is very beneficial for diversification.
4. By regularly adjusting the cryptocurrency/US stock portfolio, you can reduce risk and obtain additional returns.
5. Correlations develop over time, so these results may only be temporary, but as the market matures, they may cease to exist.
