Hierarchical risk parity portfolio design of traditional risky assets and cryptocurrencies in the Philippines

• Main Author: Edra, Jan Marie Claire J.
• Format: text
• Language: English
• Published: Animo Repository 2023
• Subjects: Investments—Philippines; Cryptocurrencies—Philippines; Finance and Financial Management
• Online Access: https://animorepository.dlsu.edu.ph/etdm_finman/9; https://animorepository.dlsu.edu.ph/context/etdm_finman/article/1010/viewcontent/Hierarchical_Risk2_Parity_Portfolio_Design_of_Traditional_Risky_As_Redacted.pdf
• Institution: De La Salle University

The Philippines saw the heightened interest of the investing public in cryptocurrencies when digital assets began gaining popularity, especially during the COVID-19 pandemic. This study introduces a portfolio of bonds, stocks, and foreign currency in the Philippines, combined with cryptocurrencies, by applying a method based on graph theory and machine learning techniques – the hierarchical risk parity approach. An out-of-sample comparison with traditional portfolio strategies shows that the hierarchical risk parity portfolio outperforms in terms of risk-adjusted return. The identified optimal portfolio reveals that only a small portion of the investment shall be allocated to cryptocurrencies, and much of the capital should still be with conventional assets.