Dynamic Portfolio Optimization with Diversification Analysis and Asset Selection Amidst High Correlation Using Cryptocurrencies and Bank Equities

Hamdan Bukenya Ntare (), John Weirstrass Muteba Mwamba and Franck Adekambi
Additional contact information
Hamdan Bukenya Ntare: School of Economics and Econometrics, University of Johannesburg, Auckland Park 2092, South Africa
John Weirstrass Muteba Mwamba: School of Economics and Econometrics, University of Johannesburg, Auckland Park 2092, South Africa
Franck Adekambi: School of Economics and Econometrics, University of Johannesburg, Auckland Park 2092, South Africa

Risks, 2025, vol. 13, issue 6, 1-22

Abstract: There has been growing interest among investors to include cryptocurrencies in their portfolios because of their diversification potential. However, the diversification role of cryptocurrencies when added to South African bank equities is yet to be determined. This study rigorously evaluates asset co-movement and diversification benefits of integrating cryptocurrencies into South African bank equity portfolios. Using advanced financial engineering techniques, including multi-asset particle swarm optimizer (MA-PSO), random optimizer, and a static equal-weighted portfolio (EWP) model, this study analyzed the dynamic portfolio performance and diversification of cryptocurrencies in the 2017–2024 period. The portfolio performance of the three methods is also compared with the results from the traditional one-period mean–variance optimization (MVO) method. The findings underscore the superiority of dynamic models over static EWP in assessing the impact of cryptocurrency inclusion in bank equity portfolios. While pre-COVID-19 studies identified cryptocurrencies as effective hedges against market downturns, this protective role appears attenuated in the post-COVID-19 era. The dynamic MA-PSO model emerges as the optimal approach, delivering better-diversified portfolios. Consequently, South African portfolio managers must carefully evaluate investor risk tolerance before incorporating cryptocurrencies, with regulators imposing stringent guidelines to mitigate potential losses.

Keywords: asset co-movement; diversification; cryptocurrencies; PSO (search for similar items in EconPapers)
JEL-codes: C G0 G1 G2 G3 K2 M2 M4 (search for similar items in EconPapers)
Date: 2025
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.mdpi.com/2227-9091/13/6/113/pdf (application/pdf)
https://www.mdpi.com/2227-9091/13/6/113/ (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:gam:jrisks:v:13:y:2025:i:6:p:113-:d:1680148

Access Statistics for this article

Risks is currently edited by Mr. Claude Zhang

More articles in Risks from MDPI
Bibliographic data for series maintained by MDPI Indexing Manager ().