Understanding Commodities and Sharpe Ratio

Very Hard Commodities Investment Risk And Return

Consider the following scenario involving a hedge fund that specializes in commodities investments. The fund has been analyzing the historical volatility and returns of various commodities over the last two decades, noticing significant price fluctuations correlating with global economic events, geopolitical tensions, and weather patterns.

The manager is preparing a report to address the risk-adjusted returns of the fund's commodity positions, specifically focusing on the Sharpe Ratio, which measures the performance of an investment compared to a risk-free asset, after adjusting for its risk.

Which of the following statements about the risk and return characteristics of commodities is most accurate as it pertains to the Sharpe Ratio?

Commodities generally exhibit a higher Sharpe Ratio than equities because they are less correlated with traditional asset classes.

The Sharpe Ratio for a commodity investment tends to be lower during times of high volatility due to increased price dynamics affecting the return distributions.

A commodity’s Sharpe Ratio can be consistently improved by hedging strategies that eliminate all systematic risks associated with the commodity.

Hint

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