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Risk management insights from Markowitz optimization for constructing portfolios with commodity futures

Author

Listed:
  • WILFORD, D Sykes

    (The Citadel)

Abstract

Based upon a Markowitz methodology, this paper considers use of commodities futures as assets to enhance portfolio diversification. A very simplistic methodological approach is chosen to allow various portfolio issues to be highlighted with data from the recent financial crisis. Naïve long-only diversification (with commodities) does not add a great deal of value relative to the event risk that can (and often does) occur. The opposite is concluded for the long/short approach. We find commodities can be key drivers in risk mitigation over time and in crisis conditions when utilized in long/short portfolios. Focus upon crisis risk exposes many of the fallacies inherent to simplistic portfolio creation and management.

Suggested Citation

  • WILFORD, D Sykes, 2014. "Risk management insights from Markowitz optimization for constructing portfolios with commodity futures," Journal of Financial Perspectives, EY Global FS Institute, vol. 2(2), pages 141-150.
    • Handle: RePEc:ris:jofipe:0055
    as

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    Citations

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    Cited by:

    1. Karagiannidis, Iordanis & Sykes Wilford, D., 2015. "Modeling fund and portfolio risk: A bi-modal approach to analyzing risk in turbulent markets," Review of Financial Economics, Elsevier, vol. 25(C), pages 19-26.
    2. Iordanis Karagiannidis & D. Sykes Wilford, 2015. "Modeling fund and portfolio risk: A bi‐modal approach to analyzing risk in turbulent markets," Review of Financial Economics, John Wiley & Sons, vol. 25(1), pages 19-26, April.

    More about this item

    Keywords

    Commodity Risk; Portfolio Theory; Portfolio Risk; Risk Management; Asset Allocation; Markowitz Optimization;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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