Commodities

Question 1

Commodities are ________ correlated with stocks and equities.

(positive, negative)

Answer 1

negatively

Question 2

Commodities are _______ correlated with inflation.

positive, negative

Answer 2

positively

Question 3

Why do commodities diversify some of the risks associated with owning both stocks and bonds?

Answer 3

Stocks are negatively correlated with inflation, whereas commodities are not. So owning commodities provides a diversification benefit.

Question 4

How are commodity prices impacted by economic output?

Answer 4

“On the other hand, spot prices of commodities reflect current economic activity to a much greater degree. Thus, commodity prices tend to be low during periods of weak economic output.”

Question 5

If inflation is declining, how would this impact commodities prices?

Answer 5

Commodities prices would decline

Question 6

Does holding commodities historically improve performance?

Answer 6

“Using historical returns, he finds the inclusion of commodities improves returns by an average of 1.33 percent for each level of risk.”

Question 7

What vehicles can you use to invest in commodities?

Answer 7

• Equities of Commodity Producers
• Collateralized Commodity Futures
• Exchange Traded Funds (ETFs)

Question 8

What type of risk can commodities hedge against?

Answer 8

Commodity futures diversify the systematic risk of equity investing—the part that is not supposed to be diversifiable.