Handbook of Finance: Financial Markets and Instruments

Chapter 56. Diversify a Portfolio with Tangible Commodities

HENRY G. JARECKL MD

Chairman, The Falconwood Corporation

TERRENCE F. MARTELL, PhD

Saxe Distinguished Professor of Finance, Zicklin School of Business, Baruch College/CUNY

Abstract: Tangible commodities represent an asset class separate from stocks and bonds. Historical returns of a diversified portfolio of commodities are as high as those of equities and are not correlated with them. Thus, the inclusion of a modest allocation of commodities to a typical stock and bond portfolio provides a diversification benefit, reducing the overall risk of that portfolio without reducing the returns. The most efficient way to get consistent exposure to commodities for diversification is by an investment in a long-only commodity fund.

Keywords: diversification, asset allocation, tangible commodities, futures, volatility, risk-adjusted return, investment portfolio, mean-variance optimization, asset class, efficient frontier, correlation, Tangible Asset Program® (TAP®)

Diversifying to reduce the risk of ruin is not a new concept. "Don't put all your eggs in one basket" is age-old wisdom. What lies behind this adage? And how do commodities relate to diversification?

This chapter will help you understand why commodities, when added to a stock and bond portfolio in reasonable quantities, tend to reduce the overall risk of the portfolio without reducing the overall return on the portfolio. The chapter will also explain what a long-only commodity fund ...