Diversification benefits refer to the reduction of overall portfolio risk achieved by combining multiple assets whose price movements exhibit imperfect correlation. The central tenet is that a portfolio comprising diverse assets can possess lower risk than any individual asset within it, for a given expected return.
Mechanism
This risk reduction occurs because negative performance in one asset tends to be offset by positive performance in another, smoothing out portfolio volatility. The mechanism relies on statistical properties such as covariance; by selecting assets with low or negative covariance, idiosyncratic risks specific to individual holdings do not synchronously impact the entire portfolio.
Methodology
In crypto investing, achieving diversification benefits involves allocating capital across various digital assets, blockchain protocols, or investment strategies that demonstrate distinct market drivers, technological underpinnings, or regulatory exposures. This approach extends to including exposure to different layer-1 and layer-2 solutions, diverse DeFi sectors, and derivatives strategies, thereby mitigating concentration risk and optimizing risk-adjusted returns within highly dynamic crypto markets.
Portfolio margining across asset classes systemically enhances CCP netting by unlocking significant capital efficiency through holistic risk diversification.
SA-CCR recognizes hedging and diversification via a hierarchical system of asset classes and hedging sets, applying full netting for direct hedges and partial offsetting for diversified risks through prescribed formulas.
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