From bottom ten to top ten: The role of cryptocurrencies in enhancing portfolio return of poorly performing stocks

• Published in: Finance research letters 2021-01, Vol.38, p.101405, Article 101405
• Main Authors: Matkovskyy, Roman, Jalan, Akanksha, Dowling, Michael, Bouraoui, Taoufik
• Format: Article
• Language: English
• Subjects: Cryptocurrency; Diversification; Economics and Finance; Humanities and Social Sciences; Market capitalization; Portfolio allocation; S&P
• ISSN: 1544-6123; 1544-6131
• DOI: 10.1016/j.frl.2019.101405

•Alternative investments (cryptocurrencies) in traditional stock portfolios add value by enhancing their performance.•PU approach yields less concentrated portfolio solutions and is less sensitive to sample size.•Results suggest higher efficacy of cryptos in boosting returns of portfolios with small-cap companies stocks.•Except the USDT, no other cryptocurrency seems to maintain its efficacy in boosting portfolio returns in the longer, 250-day time horizon. This study attempts to analyze the ability of the top 10 cryptocurrencies in enhancing portfolio returns of the 10 worst-performing stocks in the S&P600, S&P400 and S&P100 indexes, to match those of the 10 best-performing stocks therein. Applying probabilistic utility approach with different algorithms and time horizons, we find that addition of cryptocurrencies to traditional stock portfolios adds value in terms of enhancing returns. This is consistent with the growing literature on the hedging properties of cryptocurrencies against traditional financial assets.