Investment Potential of Agricultural Futures Contracts

Abstract

Investment benefits from trading live cattle, hog, com, and soybean futures contracts are considered under the assumption that the investor's risk/return evaluation is relative to a highly diversified stock portfolio. A mean-variance approach is used to find the "optimal" mix of investments for the initial stock portfolio and for portfolios which may include both stocks and futures. The addition of futures contracts to the portfolio rarely increases the portfolio return. This finding is consistent with risk-premium results of previous studies. However, investment benefits from agricultural futures are found in the form of a reduction in the portfolio's nonsystematic risk.

Should investors include commodities in their portfolios after all? New evidence

“…they do not require initial investment and therefore their respective returns are considered to be excess returns (over the risk-free rate). Therefore, to compare the rate of return on commodity futures with those on stocks and bonds, we approximate the return on a futures position with the sum of the percentage change in the futures prices and the riskfree rate of return (see e.g., Bodie and Rosansky, 1980;Fortenbery and Hauser, 1990). In the case of the commodity indexes (S&P GSCI and DJ-UBSCI), we compare the returns on stocks and bonds with the respective returns on total return indexes.…”

“…Bodie and Rosansky (1980), Fortenbery and Hauser (1990) and Conover et al (2010) find that investors can reduce risk without sacrificing return by switching from a stock portfolio to a portfolio with stocks and commodities over the periods 1950-1976, 1976-1985, and 1970, respectively. Georgiev (2001 performs a similar analysis over the period [1995][1996][1997][1998][1999][2000][2001][2002][2003][2004][2005] and finds an increase in the Sharpe ratio.…”

Advances in the Commodity Futures Literature: A Review

“…A number of empirical articles document the diversification benefits of commodities within an insample setting (e.g., Bodie and Rosansky [1980], Fortenbery and Hauser [1990], Ankrim and Hensel [1993], Jensen et al [2000], andConover et al [2010]). This is because it would increase the portfolio's expected return per unit of risk (diversification benefits).…”

Short-term and long-term dependencies of the S&P 500 index and commodity prices

“…For instance, Lummer and Siegel (1993), Ankrim and Hensel (1993), and Kaplan and Lummer (1998) find that allocating resources to this asset class offers excellent diversification benefits for equity and bonds in a mean-variance static asset allocation framework. Fortenbery and Hauser (1990) and Conover et al (2010) also note the risk reduction benefit of including commodities in a portfolio of traditional assets without sacrificing returns. Furthermore, Satyanarayan and Varangis (1996), Abanomey and Mathur (1999), and Garreth and Taylor (2001) find enhancements in portfolio returns for a given level of risk (an upward shift in the efficient frontier) if an allocation of commodities is included in an international stock portfolio.…”