Understanding Broad-Based vs. Sector-Specific Commodity Indices

Medium Commodities Investment Commodity Indices

As a portfolio manager considering exposure to commodities, you are evaluating different commodity indices. Each index has unique characteristics that can affect its performance and risk profile. You are particularly interested in the differences between a broad-based commodity index and a sector-specific index.

Which of the following statements correctly describes a critical aspect of a broad-based commodity index as compared to a sector-specific index?

A broad-based commodity index typically encompasses a wider variety of commodities, allowing for better diversification and reduced idiosyncratic risk compared to a sector-specific index.

A broad-based commodity index is primarily focused on agricultural commodities, thus providing greater inflation hedging benefits than a sector-specific index.

A broad-based commodity index generally has lower volatility than sector-specific indices due to its concentration in energy commodities.

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