Crude Oil Futures Risk and Return Characteristics

Very Hard Commodities Investment Risk And Return

Consider a hedge fund manager specializing in a commodities investment strategy. This manager is evaluating the risk and return profile of investing in crude oil futures compared to other asset classes. The manager considers potential factors influencing the futures market: supply disturbances, geopolitical factors, and weather patterns, alongside the theoretical basis of a risk-return relationship.

The manager comes across three investment strategies related to crude oil futures. The first strategy is a long-only investment, the second involves active trading of both long and short positions, and the third utilizes futures contracts while hedging against commodity price movements.

Which of the following statements accurately reflects the risk and return characteristics of commodities, particularly in the context of crude oil futures investment?

Long-only crude oil futures investments typically exhibit lower volatility compared to equities, but they offer limited upside potential.

An active trading strategy in crude oil futures generally results in higher expected returns at the cost of increased management fees and transaction costs.

Utilizing hedging strategies in crude oil futures leads to greater overall portfolio volatility, given the presence of counterparty risk.

Hint

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