ALTERNATIVE INVESTMENTS: NEW PARADIGM OF PORTFOLIO RISK MODELING

Abstract

The article explores a new approach to reducing portfolio risk by integrating alternative investment assets and cryptocurrencies into traditional portfolios. It presents a comprehensive study aimed at evaluating the effectiveness of diversification. A database of indices representing various segments of the traditional stock market, alternative assets related to commodity markets, real estate, cryptocurrencies, and cryptocurrencies with the highest capitalization was established. The research investigates the correlation coefficients between individual indices representing traditional, alternative assets, and cryptocurrencies during periods of economic stability, crisis, and post-crisis recovery. A correlation analysis with a rolling window of 100 trading days was conducted for the main traditional index, S&P 500, and other indices from the selection. Within the framework of the study, portfolios were designed following the principles of minimizing risk and maximizing return per unit of risk, utilizing individual categories of traditional assets, alternative assets, cryptocurrencies, and their diverse combinations. Special attention is given to the empirical validation of the approach based on market data from 2020-2021 to practically confirm the positive effect of diversification considering the investor's risk tolerance. The role of alternative investments in reducing risk and enhancing returns, especially in conditions of market fluctuations, is revealed, highlighting their importance for the modern investment process. The study emphasizes the need for a flexible investment strategy that considers market volatility and the dynamics between different asset classes. The recommendations provided in the article aim to support investors in making informed decisions based on scientifically grounded analysis and a comprehensive understanding of market processes.