Does commodity exposure benefit traditional portfolios? Evidence from India


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Commodities and commodity futures are expected to benefit stock and bond portfolio diversification because traditional asset types like equities and bonds have low correlations with commodities. During periods when stocks and bonds may underperform, commodities may provide a hedge against inflation and other economic uncertainties. This study investigates the diversification benefits of adding commodities to a traditional portfolio of stock and bonds from the perspective of an Indian investor. It employs several commonly used asset allocation strategies such as mean-variance, equal risk contribution, most diversified portfolio, and equal weight portfolio on different commodity derivative groups. The performance of various portfolios indicates that not all commodity groups provide substantial diversification benefits to a traditional portfolio. Agricultural commodities enhance performance (with an Omega ratio of 1.654), whereas metal and energy-related commodities do not diversify the traditional portfolio significantly (Omega ratio of 1.087 and 0.945, respectively). Gold and different equity sectors also provide some diversification benefits. This study also supports the hypothesis that the behavior of different commodity groups is quite different.

The infrastructural support provided by the FORE School of Management, New Delhi, in completing this paper is gratefully acknowledged.

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    • Table 1. Descriptive statistics
    • Table 2. Correlation matrix of asset returns for the full period
    • Table 3. Risk and returns of portfolios with different commodity groups
    • Table 4. Performance measures of portfolios with different commodity groups
    • Table 5. Risk and returns of portfolio with gold, gold futures and equity sectors
    • Table 6. Performance measures of portfolios with gold, gold futures, and sectoral equity indices
    • Conceptualization
      Vikas Pandey
    • Data curation
      Vikas Pandey
    • Formal Analysis
      Vikas Pandey
    • Investigation
      Vikas Pandey
    • Methodology
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    • Resources
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    • Software
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    • Validation
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    • Visualization
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    • Writing – original draft
      Vikas Pandey
    • Writing – review & editing
      Vikas Pandey