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arXiv · 2501.12841

Optimal vs. Naive Diversification in the Cryptocurrencies Market: The Role of Time-Varying Moments and Transaction Costs

Heming Chen·Xiaojing Cai
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Abstract

This study investigates three central questions in portfolio optimization. First, whether time-varying moment estimators outperform conventional sample estimators in practical portfolio construction. Second, whether incorporating a turnover penalty into the optimization objective can improve out-of-sample performance. Third, what type of optimal portfolio strategies can consistently outperform the naive 1/N benchmark. Using empirical evidence from the cryptocurrencies market, this paper provides comprehensive answers to these questions. In the process, several additional findings are uncovered, offering further insights into the dynamics of portfolio construction in highly volatile asset classes.

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Heming Chen, Xiaojing Cai. 2025-01-22. Optimal vs. Naive Diversification in the Cryptocurrencies Market: The Role of Time-Varying Moments and Transaction Costs. https://arxiv.org/abs/2501.12841

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