Risks and Returns of Commodities Investment

As an alternative investment category, commodities present unique risk and return characteristics that can significantly impact portfolio performance. Consider a hypothetical scenario where an investor allocates 15% of their portfolio to a commodities futures strategy. This allocation is intended to hedge against inflation and benefit from price appreciation driven by supply and demand dynamics.

Discuss the primary risks associated with investing in commodities, including market risk, liquidity risk, and regulatory risk. Additionally, analyze the potential returns that can be anticipated from this asset class compared with traditional equity and fixed-income investments. Support your discussion with relevant theoretical frameworks, such as the Capital Asset Pricing Model (CAPM) and the Efficient Market Hypothesis (EMH), while clearly articulating how these frameworks apply to commodities.