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Commodity futures as an instrument for portfolio diversification

Blum, Jonas LU and Raetsch, Philipp Maximilian LU (2017) NEKN02 20171
Department of Economics
Abstract
This thesis examines the diversification contribution of individual commodity futures to a traditional portfolio consisting of stocks and bonds. The main focus hereby lies on the potential portfolio risk reduction when switching to a diversified portfolio. In utilizing a unique approach in terms of data frequency, evaluation methods, and consideration of different states of the world, the authors’ findings may add considerable value to existing research. Applied theories include the Markowitz optimization as well as the Sharpe ratio. Furthermore, extensive correlation as well as higher-order moments analyses are performed. The investigation of different (extreme) economic environments and the application of a real-world scenario contribute... (More)
This thesis examines the diversification contribution of individual commodity futures to a traditional portfolio consisting of stocks and bonds. The main focus hereby lies on the potential portfolio risk reduction when switching to a diversified portfolio. In utilizing a unique approach in terms of data frequency, evaluation methods, and consideration of different states of the world, the authors’ findings may add considerable value to existing research. Applied theories include the Markowitz optimization as well as the Sharpe ratio. Furthermore, extensive correlation as well as higher-order moments analyses are performed. The investigation of different (extreme) economic environments and the application of a real-world scenario contribute to the derivation of sophisticated portfolio compositions. Main findings of this thesis comprise a general beneficial variance reduction when adding commodities to a traditional portfolio. The differentiation between various economic states also reveals that portfolio risk can always be reduced by altering the exposure in the individual asset classes. Yet, investors generally face a trade-off as portfolio returns diminish. Nevertheless, under certain economic environments, investors are able to increase both, risk and return with a diversified portfolio. Overall, the findings in this thesis confirm commodity futures as valuable instruments from the diversification perspective of a risk-averse investor. (Less)
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author
Blum, Jonas LU and Raetsch, Philipp Maximilian LU
supervisor
organization
course
NEKN02 20171
year
type
H1 - Master's Degree (One Year)
subject
keywords
Commodity futures, Markowitz, Sharpe ratio, Portfolio, Statistical moments
language
English
id
8909544
date added to LUP
2017-06-13 15:19:51
date last changed
2017-06-13 15:19:51
@misc{8909544,
  abstract     = {This thesis examines the diversification contribution of individual commodity futures to a traditional portfolio consisting of stocks and bonds. The main focus hereby lies on the potential portfolio risk reduction when switching to a diversified portfolio. In utilizing a unique approach in terms of data frequency, evaluation methods, and consideration of different states of the world, the authors’ findings may add considerable value to existing research. Applied theories include the Markowitz optimization as well as the Sharpe ratio. Furthermore, extensive correlation as well as higher-order moments analyses are performed. The investigation of different (extreme) economic environments and the application of a real-world scenario contribute to the derivation of sophisticated portfolio compositions. Main findings of this thesis comprise a general beneficial variance reduction when adding commodities to a traditional portfolio. The differentiation between various economic states also reveals that portfolio risk can always be reduced by altering the exposure in the individual asset classes. Yet, investors generally face a trade-off as portfolio returns diminish. Nevertheless, under certain economic environments, investors are able to increase both, risk and return with a diversified portfolio. Overall, the findings in this thesis confirm commodity futures as valuable instruments from the diversification perspective of a risk-averse investor.},
  author       = {Blum, Jonas and Raetsch, Philipp Maximilian},
  keyword      = {Commodity futures,Markowitz,Sharpe ratio,Portfolio,Statistical moments},
  language     = {eng},
  note         = {Student Paper},
  title        = {Commodity futures as an instrument for portfolio diversification},
  year         = {2017},
}