Before starting to invest in crypto, it’s important to understand what the concept of risk assets means. Check out the detailed explanation of this term below!
What Are Risk Assets?
Risk assets are investments that have a higher degree of risk and potential for volatility but also offer the possibility of higher returns.
What You Need To Know About Risk Assets
Some traditional examples of risk assets include equities, commodities, Forex, high-yield bonds, and real estate.
However, as you may have concluded from the risk assets definition, cryptocurrencies are also generally categorized as such. This is mainly due to their high volatility, as their prices can fluctuate rapidly and significantly, which can lead to substantial gains or losses for investors.
Additionally, the cryptocurrency market is largely unregulated, which means that there’s an increased risk of fraud and other illegal activities. Thus, it’s important for investors to understand the risks involved in investing in crypto and to only invest what they can afford to lose.
Overall, including risk assets in a portfolio can potentially increase the overall volatility of the portfolio. However, if the investment is thought-through and well-timed, it can also provide an opportunity for higher returns, which can be beneficial for the portfolio’s performance.
It’s important to note that the degree to which risk assets affect a portfolio will depend on the ratio of funds allocated to them. Suppose an investor has a portfolio that consists of 55% stocks, 40% bonds, and 5% hedge funds.
If the investor decides to allocate 2% of their portfolio to cryptocurrencies, the allocation will be relatively small in comparison to the rest of the assets. Thus, the impact on the overall risk of the portfolio is expected to be modest. Naturally, if they were to increase the allocation to 20%, the influence would be way more significant.
