Enhancing Portfolio Diversification with Commodities

Very Hard Portfolio Risk And Return Portfolio Diversification

Imagine that you are managing a portfolio composed of several different asset classes, including stocks, bonds, and real estate investment trusts (REITs). You are considering adding a new asset class, commodities, to your portfolio to improve its diversification.

Which of the following statements best supports the idea that adding commodities can enhance the overall risk-return profile of your portfolio?

Commodities typically have high correlation with equities, which can enhance overall returns.

Adding commodities could provide a hedge against inflation, thus reducing portfolio risk.

The historical volatility of commodities is lower than that of equities, leading to decreased portfolio risk.

Hint

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