Fintech_Project

Crypto, Commodities, & S&P 500 Correlation: A Brief Analysis of 1 year.

Background

Portfolio Optimization is used for risk-averse investors to construct portfolios to optimize or maximize expected return based on a given level of market risk, emphasizing that risk is an inherent part of higher reward

Also, with the pandemic (COVID-19) situation, there are uncertainities linked in each sector. So the brief analysis of how crytpo, commodities and S&P 500 markets are performing and how the various news / events affect the prices.

Source of Record

• API for financial data from Yahoo! Finance
• Bloomberg Stock Market
• Twitter News Feed
• Cointelegraph News

List of Stocks / Tickers

• Crytocurrency - Bitcoin, Bitcoin-Cash & Etherum
• Commodities - Gold & Silver
• Stock - S&P 500

Comparision of Prices of all stocks / tickers

• Analysis shows that BTC-USD was the most volatile across the year
• Due to pandemic situation, all the assets show significant drop starting March 2020.
• Commodities i.e. Gold has grown significantly from around $1300 to $ 1700. But as all other stocks, March 2020 had seen major drop to $1479.

Quantitative Analysis

• Performance Analysis

• BTC still has the best returns, while gold is a distant second. Silver and the SP500 track very closely, as do BTCASH and ETH which are near the bottom.

Correlation, Beta & Sharpe Ratio

• Correlation between stocks and other assets class

Evaluate Risk

Standard Deviation

Bitcoin_Cash    0.061713
Bitcoin         0.043095
Etherum         0.049667
Gold            0.010216
Silver          0.017035
SP500           0.016209

Volatility

• Volatility is a statistical measure of the dispersion of returns for a given security or market index. In most cases, the higher the volatility, the riskier the security.

Gold            0.162170
SP500           0.257317
Silver          0.270420
Bitcoin         0.684110
Etherum         0.788435
Bitcoin_Cash    0.979665

• Bitcoin Cash is the most risky investment followed by Etherum.
• Gold is at the least risk.

Beta

• High Beta stocks are supposed to be riskier but provide higher return potential

Bitcoin_Cash : 0.89
Bitcoin : 0.71
Etherum : 1.01
Gold : 0.01
Silver : -0.06
SP500 : 1.0

Sharpe Ratio

Sharpe Ratio helps to understand the return of an investment compared to its risk.

Bitcoin_Cash    0.778293
Bitcoin         1.156295
Etherum         0.746208
Gold            1.210387
Silver          0.245059
SP500           0.178116

• Bitcoin & Gold have highest return to risk as compared to other assets.

Portfolio with Static Weights

• Pre-defined weights = [0.1, 0.2, 0.1, 0.2, 0.1, 0.3]

• Statistics :

Expected annual return : 35.0%
Annual volatility/standard deviation/risk : 33.0%
Annual variance : 11.0%

Portfolio Optimization: Monte Carlo Simulation

Portfolio Optimization is used for risk-averse investors to construct portfolios to optimize or maximize expected return based on a given level of market risk, emphasizing that risk is an inherent part of higher reward.

Single Random Simulation

• Set our weights to a random numpy array
• Rebalance the weights so they add up to one
• Calculate the expected portfolio return
• Calculate the expected portfolio volatility
• Calculate the Sharpe Ratio

Sharpe Ratio
0.9469891810355706

Multiple Random Simulation

Multiple Random Simulation with highest Sharpe Ratio

Max Sharpe Ratio - 1.246

Portfolio Optimization : Optimization Algorithm Using Scipy

• Calculate Efficient Frontier - Set of optimal portfolios that offer the highest expected return for a defined level of risk or the lowest risk for a given level of expected return.

• Optimal Weights

Bitcoin Cash - 0.00
Bitcoin - 0.19
Etherum - 0.00
Gold - 0.81
Silver - 0.00
SP500 - 0.00

• Use of Scipy library to calculate the results wherein we minimize sharpe ratio, keep the weights within 1 and use Sequential Least Squares Programming (SLSQP) method

• Optimal Results -

Returns - 0.30
Volatility - 0.19
Sharpe Ratio - 1.59