Thanks for the helpful summary. Does this imply that young people should invest in cryptocurrency?
Looking at the Samuelson share equation, I’m not sure that premia have been established for crypto? But they do seem more volatile, and perhaps you can invoke CAPM or something to therefore claim they have a premium?
My impression is that they are also easier to leverage, although I’m less sure of that.
Does this imply that young people should invest in cryptocurrency?
One way to increase your market exposure would be to invest in high-beta assets, yes.
On the other hand, there’s some evidence that high-beta stocks have returns lower than you’d expect, given their volatility. In other words, investors are not actually compensated for increased risk with increased reward. (See Betting Against Beta, or Eric Falkenstien’s work.) The standard explanation is that many investors are unable to (or prefer not to) use leverage, so, in order to get their preferred market exposure they over-invest in high-beta stocks (rather than just diversifying and using leverage), driving up their prices and driving down their returns.
On the other other hand, cryptocurrency is pretty new and has had historical returns and volatility pretty far from the returns and volatility of typical of high-beta stocks (I believe; haven’t checked the numbers), so it’s not clear to me whether the same effect would be playing out.
(Personally, I have very much over-weighted cryptocurrency in my portfolio, but that’s been based on an inside-view bet that it would do well. In the long run I would expect to treat it as an asset class like any other and diversify accordingly.)
EDIT: This or this is probably a better link for Eric Falkenstein.
Thanks for the helpful summary. Does this imply that young people should invest in cryptocurrency?
Looking at the Samuelson share equation, I’m not sure that premia have been established for crypto? But they do seem more volatile, and perhaps you can invoke CAPM or something to therefore claim they have a premium?
My impression is that they are also easier to leverage, although I’m less sure of that.
One way to increase your market exposure would be to invest in high-beta assets, yes.
On the other hand, there’s some evidence that high-beta stocks have returns lower than you’d expect, given their volatility. In other words, investors are not actually compensated for increased risk with increased reward. (See Betting Against Beta, or Eric Falkenstien’s work.) The standard explanation is that many investors are unable to (or prefer not to) use leverage, so, in order to get their preferred market exposure they over-invest in high-beta stocks (rather than just diversifying and using leverage), driving up their prices and driving down their returns.
On the other other hand, cryptocurrency is pretty new and has had historical returns and volatility pretty far from the returns and volatility of typical of high-beta stocks (I believe; haven’t checked the numbers), so it’s not clear to me whether the same effect would be playing out.
(Personally, I have very much over-weighted cryptocurrency in my portfolio, but that’s been based on an inside-view bet that it would do well. In the long run I would expect to treat it as an asset class like any other and diversify accordingly.)
EDIT: This or this is probably a better link for Eric Falkenstein.