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| Type | Bachelor's Thesis |
| Scope | Discipline-based scholarship |
| Title | Commodities a Component of Asset Allocation |
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| Institution | University of Zurich |
| Faculty | Faculty of Economics, Business Administration and Information Technology |
| Number of Pages | 37 |
| Date | 2014 |
| Abstract Text | Executive summary The aim of this thesis is to determine whether investing in commodities benefits a diversified investor. In a world, which has become increasingly dynamic, leveraged and global, risks have significantly increased. Therefore, it is crucial for individual and institutional investors to find new strategies to reduce their portfolio risk. The first part of the thesis analyses the question of how an investor can get exposure to the commodity markets. This analysis is based on the differentiation of direct and indirect investments in the market. Direct investment types are characterized by the actual storage of a commodity or the future holding and its respective taking delivery of the commodity. Whereas the indirect ways are represented by investments done through financial vehicles (ETFs, indexes etc.). Furthermore, in this part different commodity market places are mentioned and explained. In the second part of the thesis the correlation between different commodities and commodity indexes to the traditional asset classes like equity, fixed income and cash market are analyzed to determine if diversification brings added value for an investor. For each asset class weekly prices for a range of consideration of 20 years, from 1994 until 2013 are applied. For the calculation two different types of correlations are adopted. The first is the static correlation, which analyses the correlation between the assets for each calendar year separately. The second one is the dynamic correlation, which shows always the relationship in ranges of 52 weeks, but for the next observation it will take in consideration the successive 4 weeks and leave out the first 4. The roll correlation moves forward in time. Both of these two methods are based on weekly absolute prices and delta prices. The results are disappointing, since for all asset classes there is no clear negative correlation over time. The correlations are characterized by extremely high volatility, moving from high 2 positive to high negative correlation. However, what can be concluded from the result is the increasing financialization of the commodity markets. After the year 2000 periods of high correlation predominated. The implied result is that gold actually is the best commodity for reducing the volatility of a portfolio. This brings a positive effect to the investor. Another interesting fact is that small equity indexes, like the SMI, tend to be more negatively correlated to commodities than large equity indexes like the S&P500 and MSCI World. Key words: Commodities, asset allocation, correlation, commodity markets and financialization. |
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