Part 4/8:
While the Sharpe ratio is valuable, it has limitations, especially in its treatment of volatility. It penalizes positive volatility, which can skew perceptions of an asset’s potential. To address this nuance, investors might consider the Sortino ratio, which capitalizes on positive performance over time. In our simulation example, the portfolio maximizing the Sortino ratio suggested an even larger allocation to Bitcoin at roughly 82%.
On the other end of the spectrum, those looking to minimize volatility altogether would see a portfolio comprising 93% Bitcoin and only 7% Ethereum, illustrating the varying goals one might pursue through portfolio construction.