The effectiveness of adding commodities to a multi-asset portfolio

Abstract

Commodity investment is fundamentally motivated by a desire to improve the performance of portfolios composed of stocks and bonds. Throughout this paper we analyze the out-of-sample performance effects derived from including commodities in a stock-bond portfolio for seven distinct asset allocation models – equally and strategically weighted portfolios, risk-parity, reward-to-risk timing, as well as, minimum-variance, mean-variance, and Black-Litterman. We analyze seven commodity groups and consider two distinct investor profiles, while constructing portfolios in which commodities are picked in a consistent standard format, and portfolios in which commodities are dynamically picked and adjusted every month. Precious metals emerge from our static portfolio allocation analysis as the commodity group with the clearest and most significant portfolio benefits. Concurrently, dynamic portfolio allocation yields very appealing returns, performing well in terms of risk-return tradeoff measures, while delivering more consistent results across asset allocation models when compared to static allocation. Portfolio gains remain highly linked to the macroeconomic environment, demonstrating that investments in industrial metals generate considerable improvements for favorable subperiods of stability and growth, whereas precious metals are particularly beneficial in the face of unstable subperiods.

Date of Award	27 Jan 2021
Original language	English
Awarding Institution	Universidade Católica Portuguesa
Supervisor	Paul Karehnke (Supervisor)