Portfolio management: why adding bitcoin makes sense

This diversification strategy was awarded a Nobel Prize

Photo by DrawKit Illustrations, Unsplash

“Diversification is prudent and sensible; a rule of behavior that does not imply the superiority of diversification must be rejected both as a hypothesis and as a maxim, ”wrote Harry Markowitz, a wonderfully talented young economist, in the ‘Journal of Finance’ in 1952. This article, which won the Nobel Laureate in 1990, he laid the foundations for “modern portfolio management theory,” a mathematical framework for choosing an optimal asset allocation.

How Diversification Reduces Volatility

This theory assumes that a rational investor should maximize his returns relative to the risk (the volatility of returns) he takes. It naturally follows that assets that deliver high and reliable returns should feature prominently in a reasonable portfolio. But Markowitz’s genius has been to show that diversification can reduce volatility without sacrificing returns. Diversification is the financial version of the language “the whole is greater than the sum of its parts.”

“The genius of Mr. Markowitz has been to show that diversification can reduce volatility without sacrificing profitability.”

An investor looking for high returns without volatility might not be interested in cryptocurrencies, such as bitcoin, since […]

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