onsiderable controversy exists over the amount of risk in futures markets.C Keynes (1930, p. 137; see Peck 1983, p. 68) believed that futures prices are quite variable and thus price risk is associated with the ownership of futures contracts. He believed that risk premiums are paid by hedgers to speculators for bearing risk.' Keynes estimated the risk premiums to be sizable-that is, on the order of 10 to 20% per annum.A different approach to examining risk is provided by the capital asset pricing model (CAPM). According to the CAPM, risk-which is called systematic risk in CAPM terminology-is determined from the covariance between the return on an asset and the return on the market portfolio of all assets. As the covariance increases, the risk associated with the ownership of an asset increases. An asset whose return has a high covariance with the return on the market portfolio is risky because including it in a portfolio increases the variability of the portfolio's return. By contrast, an asset whose return has a low covariance with the return on the market portfolio is not risky because including it will have little effect on the variability of the portfolio's return. Dusak (1973) first applied the CAPM to commodities and found that the returns from owning wheat, corn, and soybean futures had essentially zero covariance with the return on the market portfolio. She concluded that even though grain and soybean futures prices are quite variable, ownership of futures *This research was partially completed while Emmett Elam and Daniel Vaught were Assistant Professor and Graduate Research Assistant, respectively, at the Dept. of Agricultural Economics and Rural Sociology, University of Arkansas.'Speculators, as a lot, were viewed as providing insurance against changes in prices and not as prophets of what prices would be in the future. In Keynes' (see Peck, 1983, p. 67) words, Indeed without paying the slightest attention to the prospects of the commodity he [speculator] deals in or giving a thought to it, he may, one decade with another, earn substantial remuneration merely by running risks and allowing the results of one season to average with those of others just as an insurance company makes profit without pretending to know more about an individual's prospects of life or the chances of his house taking fire than he knows himself.
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