Evaluating Commodity Indices for Portfolio Diversification

As an investment analyst at a large institutional investment firm, you are tasked with evaluating the role of commodity indices in portfolio diversification and risk management strategies. Your firm is considering adding a commodity index to its existing investment portfolio, which is primarily composed of equity and fixed-income securities.

1. Discuss the characteristics and types of commodity indices that are commonly used by investors, including their methodologies and the commodities they include.

2. Analyze the potential benefits and drawbacks of utilizing a commodity index in a diversified investment portfolio. In your analysis, consider how commodity indices can influence overall portfolio risk, returns, and correlation with traditional asset classes.

3. Finally, assess the impact of macroeconomic factors, such as inflation and geopolitical events, on commodity indices performance, and how this might affect your firm's investment decision.