WSX Capital management is considering changing the allocation of its clients' portfolios to include commodities. The portfolios are currently invested in stocks, bonds, real estate, and hedge funds. Which of the following is the most important investment attribute to evaluate when adding commodities as an asset class?
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A. B. C.B
When considering adding commodities as an asset class to the clients' portfolios, WSX Capital management needs to evaluate the most important investment attribute. Let's analyze each option to determine the most relevant factor:
A. The return volatility of commodities: Return volatility refers to the degree of fluctuation or variability in the returns of an investment. While evaluating the return volatility of commodities is important, it alone may not be the most crucial factor when deciding to add commodities to the portfolio. High volatility may indicate the potential for higher returns but also carries increased risk. Therefore, while important, it is not the most critical attribute to evaluate.
B. The relationship between commodity returns and other asset class returns: This option considers the correlation or relationship between the returns of commodities and the returns of other asset classes in the portfolio, such as stocks, bonds, real estate, and hedge funds. Evaluating the correlation is essential because it provides insights into how commodities perform relative to other asset classes. If commodities have a low or negative correlation with existing assets, they can potentially enhance diversification and reduce overall portfolio risk. Therefore, this attribute is significant and should be considered when deciding to add commodities.
C. The beta of the portfolio after adding commodities: Beta measures the sensitivity of an investment's returns to the overall market returns. In this case, the beta of the portfolio after adding commodities would indicate how the portfolio's risk changes when commodities are included. While beta is a useful measure to assess systematic risk, it may not be the most crucial attribute when specifically evaluating the addition of commodities. Beta primarily focuses on market-related risk, and commodities, being a distinct asset class, may have different drivers of returns that are not fully captured by beta alone.
Considering the above analysis, the most important investment attribute to evaluate when adding commodities as an asset class to the portfolio is B. The relationship between commodity returns and other asset class returns. Understanding the correlation between commodities and existing assets is crucial for determining the diversification benefits and potential risk reduction that commodities can bring to the portfolio.