The Business of Nature : Risk and return in physical and financial commodity investments

Recent years have witnessed an increased interest in commodity investments. Commodities have gradually become an investment vehicle on its own, as well as an addition to the investment universe of traditional stocks and bonds. One way to achieve exposure to commodities is buying futures contracts. It is also possible to buy the physical good. Other alternatives are investing in index funds, actively managed funds or exchange traded funds (ETFs). The latter may be the most feasible way. The goal is twofold; it is desired to analyze historical returns in physical and financial commodities, and by this determine if commodities may be valuable in a portfolio This thesis consists of three parts. The first includes an analysis of spot prices for five agricultural commodities; sugar, rice, corn, wheat and palm oil, benchmarked against a stock market index, i.e. MSCI World. Weekly spot prices are obtained for the 20 year period, January 1990 – December 2010. Risk and returns are calculated along with analysis of correlation across commodities and stocks, decomposition of risk, seasonal patterns and performance of the assets. The second part introduces an alternative way of investing in commodities, i.e. through exchange traded funds. An ETF is said to “act like a fund, but trade like a stock”, and its purpose is to provide an easy and cheap way to invest in specific sectors, regions, bonds, futures, or as in this thesis, a definite commodity group. ETFs can be bought at exchanges during the opening hours. Part two also examines if ETFs actually track the underlying index they claim to do. The last part offers various portfolios of stocks, commodities and ETFs, constructed and compared to the results from previous calculations. This, to evaluate the effects of including commodities or ETFs in a portfolio