A Markowitz Optimization of Commodity Futures Portfolios

Abstract

We examine the diversification benefits of using individual futures contracts instead of simply a commodity index. We determine the ex‐ante, ex‐post, and stability results for optimal Markowitz portfolios, investigate the instability between the ex‐ante and ex‐post results, and compare our results to traditional and naïve portfolios. The ex‐ante complete futures portfolio dominates the traditional and naive portfolios and the ex‐post portfolio outperforms the naïve portfolio. The instability between the ex‐ante and ex‐post results is primarily driven by the time‐varying returns of the individual assets rather than by risk. Finally, the Sharpe portfolio results are essentially identical to the Markowitz results. © 2012 Wiley Periodicals, Inc. Jrl Fut Mark 33:343‐368, 2013

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“…Georgiev (2001) and Gibson (2004) constitute portfolios with different commodity allocations and observe their improved risk-return characteristics in the mean-variance space. You and Daigler (2010) detect the diversification benefits of commodity futures by employing the mean-variance and Sharpe optimisation models. Scherer and He (2008) regress commodity indices on a portfolio of traditional assets and conclude on the diversification impact of commodities on the basis of the p-values of regression estimates.…”

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