Digital Portfolios

Digital assets are investments with binary returns: their pay-offs are either very large or very small. The author explores the features of optimal portfolios of digital assets, such as venture investments, credit assets, and lotteries. These portfolios comprise correlated assets with joint Bernoulli distributions and have substantial skews and kurtosis. The intuitions of mean-variance analysis do not carry over to these portfolios. Using a simple, standard, fast recursion technique to generate a portfolio's return distribution, the author derives investor guidelines for constructing digital-asset portfolios. Das finds that digital portfolios perform better when their assets are homogeneous in size but heterogeneous in the assets' probability of success.