Wednesday, April 12, 2006

Risk and Commodity Futures

 
Knowledge@Wharton:

Everyone uses commodities such as wheat, cocoa, crude oil, butter, coal and electricity. But most investors know that speculating on commodities in the futures markets is only for the pros, and no sensible amateur would bet his retirement or college funds on sugar, silver, orange juice or feeder cattle.But 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, Wharton finance professor Gary Gorton and K. Geert Rouwenhorst, finance professor at the Yale School of Management, have reached a surprising conclusion: Commodities offer the same returns as investors are accustomed to receiving with stocks, which are typically viewed as safe enough for ordinary investors. "That was quite startling to many people around the world, both in academia and outside academia," Gorton said. "They thought it would be lower."Commodities are, in fact, not as risky as stocks, according to Gorton and Rouwenhorst, who recently completed a paper on this topic titled, "Facts and Fantasies about Commodity Futures." Most important, commodities are negatively correlated with stocks and bonds.

This is an interesting finding, but one that is not new to many people. An interesting question is if we will see a growth in instruments such as commodity ETF or mutual funds from research such as this, we should and I hope we do. The great majority of investors are missing out on greater diversification as the common wisdom is that commodities carry more risk than do equities.

Click here to read the whole story.
Posted by Trade Monkey :: 2:17 PM :: 0 comments Perma-Link

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