Does commodity exposure benefit traditional portfolios? Evidence from India

Abstract

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