Maximizing Returns through Fundamental Analysis - Arabictrader.com

Commodity Futures as Investments 19
COMMODITY RETURNS COMPARED WITH
STOCKS AND BONDS
How have commodities fared relative to stocks and bonds This is obviously
an important question to investors since for most investors equities and
fixed-income instruments are their typical investment alternatives. In this
section we compare the returns of the equally weighted commodity portfolio
to the returns of stocks and bonds. For this we use the returns of the S&P
500, 10-year U.S. Treasury Bonds, and T-Bills. The data for these series
are explained in the appendix to this chapter. For commodities we now
switch to a fully collateralized measure. This is done by simply adding T-Bill
interest to the previously constructed equally weighted commodity index.
The reason for now switching to a fully collateralized index is that we
are now interested in comparing investment alternatives on a total return
basis and, as discussed previously, the total return a commodity future
investor receives includes interest. The time period analyzed is the period
from February 1962 through March 2007, as this is the period for which
10-year bond returns are available.
Correlations are displayed in Table 2.5. The first panel presents correlations
for monthly holding periods, the second for annual holding periods. At
TABLE 2.5 Correlation, February 1962–March 2007
Correlation of Monthly Returns
Commodities S&P 500 Bonds T-Bills CPI
Commodities 1.00 0.03 −0.15 −0.05 0.01
S&P 500 0.03 1.00 0.20 −0.03 −0.15
Bonds −0.15 0.20 1.00 0.03 −0.10
T-Bills −0.05 −0.03 0.03 1.00 0.54
CPI 0.01 −0.15 −0.10 0.54 1.00
Correlation of Annual Returns
Commodities S&P 500 Bonds T-Bills CPI
Commodities 1.00 −0.20 −0.28 −0.03 0.27
S&P 500 −0.20 1.00 0.29 0.00 −0.22
Bonds −0.28 0.29 1.00 0.10 −0.26
T-Bills −0.03 0.00 0.10 1.00 0.70
CPI 0.27 −0.22 −0.26 0.70 1.00
Notes: Commodity returns are the equally-weighted portfolio with T-bills included
(i.e., they are collateralized). Annual periods are overlapping.