Why those commodities that are most affected bythe level of economic activity (e.g., energy, precious metals) tend to be better hedges?
Look up on the curriculum but did not find the logic behind?
Anyone knows?
I try to provide my view here : If we assume that we invest in commodities (i.e. Alternative investiments) to complement a standard stock / bond portfolio to diversify our risk well, commodities have low correlation with both stocks and bonds and they are positively correlated with inflation while bonds are not and stocks not necessarily.
Hasta pronto
The key is to differentiate btw commodities that are most affected by the level of economic activity and thoste which are not (e.g. agricultural commodities)… --> you dont answer based on that… dont make any differenc of the type of commodities…
Also, commodities (according to schweser all commodities) are good hedges for expected inflation, but not necessarily for unexpected inflation.
Anyway, coming back to the first question Why those commodities that are most affected bythe level of economic activity (e.g., energy, precious metals) tend to be better hedges? and now being specific to unexpected inflation?
The more they are storable the more they are better correlated with unexpected inflation (.15 for precious metals and .46 for Energy) than other commodities (agriculture, livestock and non energy) because you pay a storage cost to hold the good.
Direct energy investments (e.g. OIL) are the best inflation hedge among commodities, that’s confirmed within the curriculum (R26).
Most of times the reason behind the commodity investments is INFLATION.
http://www.analystforum.com/forums/cfa-forums/cfa-level-iii-forum/9967185