Re-thinking diversification: Harnessing the diversification potential of AI stocks and cryptocurrencies using portfolio optimization

This paper investigates the role of artificial intelligence (AI) stocks and AI cryptocurrencies in portfolio diversification, reflecting on the rising interest in technology-oriented assets. While much research has focused on the diversification, hedging, and safe-haven properties of digital assets, such as Bitcoin and Ethereum, this study focuses on whether AI cryptocurrencies and AI stocks provide untapped diversification potential. Using mean-variance, risk parity, and higher-order moments approaches, we construct portfolios that combine AI stocks, AI cryptocurrencies, and traditional assets under various optimization frameworks. The findings reveal that the mean-variance framework is more conservative in allocating to AI cryptocurrencies, while the higher-order moments approach accommodates for greater flexibility. Seemingly, investors may benefit from expanding their asset pool to incorporate AI stocks and AI cryptocurrencies. Across most portfolio settings, gold and commodities dominate allocations, followed by AI stocks, with AI cryptocurrencies receiving only marginal weights owing to their high volatility. However, allocations to AI cryptocurrencies increase as investor risk tolerance increases, thereby highlighting their potential for risk-seeking portfolios. Overall, the results indicate that AI stocks and AI cryptocurrencies can enhance portfolio diversification and improve risk-return outcomes. These results offer valuable insights for investors seeking to optimize their portfolios, through exposure to emerging technology-driven assets while balancing traditional risk considerations. • The study explores the diversification potential of AI Stocks and AI Cryptocurrencies to a traditional portfolio. • Dominated by NVIDIA and Tesla, AI stocks perform better than AI cryptocurrencies. • AI cryptocurrencies offer limited diversification benefits while significantly increasing portfolio risk. • Unlike AI stocks, AI cryptocurrencies are not dominated by a single player in portfolio diversification. • Allocation to AI cryptocurrencies is highly sensitive to investor risk aversion, particularly driven by their explosive market behaviour.