Optimizing Portfolios in Digital Finance: An Integration of Cryptocurrencies with Conventional Assets

Abstract

The research investigates cryptocurrency's function in enhancing Pakistani financial market portfolios while examining the digital asset popularity, surged as an investment choice. The analysis combines cryptocurrencies with conventional financial products to show how they affect both risk performance and risk spread capabilities. The main goal of this research is to understand if adding cryptocurrency investments produces superior returns than standard asset allocation strategies. This study intends to join the current discussion regarding digital asset adoption in emerging economies particularly Pakistan. A time period of six years extending from January 1, 2018 to December 31, 2023 contains daily financial data which includes both traditional assets and cryptocurrencies. The dataset receives preprocessing treatments which include normalization together with outlier removal and missing value imputation. The portfolio optimization process in Jupiter Notebook implements machine learning models under naïve equal weighting and maximum return and maximum Sharpe ratio and minimum variance constraints. Excel was used to run robustness checks for the analysis which demonstrated that cryptocurrency portfolios generate higher risk-adjusted performance than traditional investment collections. This research presents digital assets as a valid investment strategy component by improving portfolio diversity and overall performance while focusing specifically on the Pakistani financial market through combination of machine learning and standard financial modeling. The research enhances available scientific understanding of cryptocurrency integration in emerging market economies while failing to find sufficient existing literature on this subject matter. Succeeding studies should analyze digital asset regulatory measures and economic conditions alongside investor acceptance patterns towards crypto adoption in Pakistan. The research could benefit from additional analysis that incorporates alternative risk management approaches alongside sophisticated portfolio optimization algorithms.