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Portfolio Investment: Are Commodities Useful?

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  • Yan, Lei
  • Garcia, Philip

Abstract

This paper investigates the usefulness of commodities in investors' portfolios within a mean- variance optimization framework. The analysis di_x000B_ers from previous research by considering multiple investment tools including individual commodity futures contracts, three generations of commodity indices and by controlling for estimation error in portfolio optimization pro- cess. Rather generally, the results demonstrate that including individual commodities or the first- and second-generation commodity indices do little to enhance portfolio performance. Similarly, when an initial portfolio is diversi_x000C_ed, the risk-reducing ability of agricultural commodities is much weaker than identi_x000C_ed by previous research. In contrast, including the third-generation indices substantially improves the portfolio's Sharpe ratio by generating higher returns and lower risk.

Suggested Citation

  • Yan, Lei & Garcia, Philip, 2014. "Portfolio Investment: Are Commodities Useful?," 2014 Conference, April 21-22, 2014, St. Louis, Missouri 285817, NCR-134/ NCCC-134 Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
    • Handle: RePEc:ags:n13414:285817
    DOI: 10.22004/ag.econ.285817
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    References listed on IDEAS

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