Improvements of portfolio performances by bitcoin based on Markowitz Model and Index Model

Abstract

Contemporarily, with the rapid development of society, investors are noticing the importance of finance and asset allocation and actively participating in the market. Achieving greater returns with controlled risk is the common goal of the vast majority of investors, and thus there has been a lot of researches focusing on portfolio optimization. As Bitcoin has become known and its high volatility has captivated people who want to achieve high returns, it seems feasible to add it to the investment portfolios to enhance the performance. However, it is crucial to investigate the impacts of Bitcoin on portfolio. On this basis, this study uses weekly data of five companies from different industries and Bitcoin to construct two portfolios with and without Bitcoin based on Markowitz model and index model to calculate annual return, annual volatility and Sharpe ratio. According to the analysis, the implementation of Bitcoin has boosted both the Sharpe ratio and annual return of the portfolio for the optimal parameter, i.e., indicating there are positive impacts for the Bitcoin. These results shed light on guiding further exploration of improving the performances of portfolios based on different types of underlying assets.