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the true magnitude of the NFT investment multiples must be substantially higher. Finally, our sample includes only about 23% NFTs that generate long-term losses. The levels of volatility observed for the NFTs in our sample may seem excessive with the standard deviation of daily returns of 11% (175% annualized). By comparison, the annualized volatility of natural gas is 51%, oil 30%, and S&P 500 index 15% (Huang, Li, Wang, and Zhou, 2020). We also find that most volatile NFTs, yield the lowest returns. A similar pattern is observed for public equities (Campbell and Hentschel, 1992), whereby volatility tends to go up after the prices fall. However, in the context of cryptocurrencies, this finding cannot be in any way explained by the leverage effect, as the NFT startups are debt-free. In the tests that follow, we examine the returns on the risk-adjusted basis by using Sharpe ratios and market-adjusted returns. A closer look at the Sharpe ratios reveal a sample average of 0.32. Interestingly, this figure compares with the historical average of 0.3 reported for publicly traded stocks (Fama and French, 2002; Ferreira and Santa-Clara, 2011). Nevertheless, over 25% of the NFTs in our sample have Sharpe ratios greater than 1 (e.g., AXS, THETA, MANA, ERN). Sharpe ratio, however, does not reflect the magnitude of the return. An asset with a low return and a low volatility can have a relatively high Sharpe ratio. As an alternative, we also examine market-adjusted returns. The performance of the NFTs on the market-adjusted basis is remarkable, with the average return of 83% for the holding period of about 300 days. Roughly 60% of NFTs in our sample deliver positive returns and over half of these earn market-adjusted returns greater than 200%. Next, we estimate the NFT alphas and betas. We follow Aggarwal, Green and Ren (2018) and use capital asset pricing model (CAPM), as a single-factor model seems to work better for alternative investments. We find that several NFTs deliver positive and significant alphas, whereas most NFTs have betas greater than 1. At the NFT portfolio level, alpha is positive and highly significant and the portfolio beta is roughly 1.1. Beta greater than 1 reflects greater 4PDF Image | NFT The Analysis of Risk and Return
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