A. When it comes to correlation, a volatile asset like cryptocurrency plays a crucial role in reducing the overall volatility of a portfolio. Decreasing portfolio volatility is essential as it helps to even out investment returns over time. This is significant for various reasons. For instance, an investor may have substantial and unpredictable liquidity requirements. If their portfolio consists of highly correlated assets and those assets are going through a period of poor performance, they may end up withdrawing a larger portion of their portfolio compared to a portfolio that includes less correlated assets. Cryptocurrency, with its low correlation to traditional assets, can be beneficial in such scenarios. Despite its volatility and significant price swings, cryptocurrency can act as a stabilizer for a portfolio when all other assets are declining. Smoothing out investment returns also has cognitive benefits for most investors. Emotional reactions can cloud judgment when investors monitor their portfolio performance. Sharp price movements tend to trigger impulsive actions, such as buying more when prices are rising (often right before a decline) or selling when prices are falling (right before a rebound). Including a small allocation of (less-correlated) cryptocurrency in a portfolio helps to moderate the overall returns, providing investors with a more steady view of their investments. This approach can help investors maintain a long-term perspective and increase their chances of success. It is important to consider cryptocurrency not in isolation, but in the context of its role in creating a well-diversified portfolio that can generate long-term wealth for investors.
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