Characteristics of Investments in Commodities and Their Role in a Portfolio
Commodities have very low correlations with traditional assets such as stocks and bonds, and therefore can be strong diversifying agents even though their long-term expected return is lower. In particular, commodities often rise during times of financial distress while other assets are falling and the diversification benefit is needed most.
Over the long term, commodity returns are explained by the business cycle, a convenience yield resulting from the ability to time consumption, and real options that allow the producers of commodities to adjust their production levels in response to prices.
Commodity investments, particularly those in storable commodities such as oil and metals, also offer a hedge against inflation. This is especially true during periods in which inflation rates change unexpectedly.
For more information, see all articles on: Active Management, Asset Allocation, Investing in Commodities, Investment Returns, Portfolio Management, Risk Management See also:
The Intelligent Investor: The Classic Text on Value Investing
Financial Statement Analysis: A Practitioner's Guide, 3rd Edition
Managing Investment Portfolios: A Dynamic Process (CFA Institute Investment Series)
