Q & A on Commodities

Here is a link to the original PDF, “Strategic Asset Allocation and Commodities“, and also to the Q&A with Bob Greer from PIMCO.

Put your thinking cap on – I am still undecided about a few of the conclusions in the paper. . .

(Bolding below is mine).

Q: And what did Ibbotson conclude regarding the optimal size of an allocation to commodities going forward?

Greer: As I mentioned previously, Ibbotson projected future commodity returns using three different methods: the capital asset pricing model, the building-blocks method and a combination of the first two methods.

The optimal allocation to commodities varied depending on the method. At the 10% standard deviation level—a moderate risk level similar to a standard portfolio of 60% stocks and 40% bonds—the optimal allocation to commodities ranged from about 22% using the capital asset pricing model to as large as 28.9% using the building-blocks method. Even at the conservative 5% risk level, optimal allocations to commodities were relatively large, ranging from about 9% up to nearly 14%.

Regardless of the method used in projecting future commodity returns, portfolios that included commodities in the opportunity set were also more efficient than those that excluded commodities, based on the Sharpe Ratio.