Investor Preferences and Bitcoin Allocations

Should investors consider allocations to bitcoin (BTC) in their investment portfolios? In their February 2022 paper entitled “Asset Allocation with Crypto: Application of Preferences for Positive Skewness”, Andrew Ang, Tom Morris and Raffaele Savi investigate how investors should think about allocations to BTC based on features of its historical return distribution. Specifically, they model optimal holdings of BTC, stocks and bonds for investors with either power utility or Cumulative Prospect Theory (CPT, loss aversion) preferences. Using monthly returns for BTC, the S&P 500 Index as a proxy for stocks and the Bloomberg Barclays Treasury Index as a proxy for bonds during July 2010 through December 2021, they find that: (more…)