Thursday, April 06, 2006

Are Commodities Futures Too Risky for Your Portfolio? Hogwash! - Knowledge@Wharton

This article is by Gorton and Rouwenhorst. The quote is from the Knowledge@Wharton April 2006 Newsletter.

Are Commodities Futures Too Risky for Your Portfolio?

"are commodities really that risky? A shortage of data has left that question unanswered. Until now. Using the most comprehensive data on commodities futures returns ever assembled....Gorton and ...Rouwenhorst have reached a surprising conclusion: Commodities offer the same returns as investors are accustomed to receiving with stocks...."
The authors also report that while commodities have about the same risk as stocks, commodities tend to be negatively correlated with the both stocks and bonds and therefore make an ideal investment for diversification purposes.

And besides, who hasn't wanted to say they trade Orange Juice like Eddie Murphy!

Working paper cite:
Rouwenhorst, K. Geert and Gorton, Gary B., "Facts and Fantasies about Commodity Futures" (February 28, 2005). Yale ICF Working Paper No. 04-20. Available at SSRN:

What a day! Two great articles. No wonder finance is so fun! Every day there are new articles to read! It's like a candy store without the calories!


Serkan said...

I think most of the reason people don't think commodities have a place in a balanced portfolio is because they don't think commodities should have any real return in the long run. They may or may not be negatively correlated to stocks or other investments, but so is cash.

Paul Skarp said...

When the general public awakenings to fact they we are witnessing negative real interest rates for the first time in decades I think their will be a mass stampede into commodity futures and managed futures products.

Although, when that happends that may very well be the blow off top. However, I think thats a long time from now.