International portfolio diversification : commodities

Abstract

We study whether Norwegian Investors should include commodities in their portfolios. Firstly, we discuss the correlation and dispersion between commodities and international equity markets, in addition to possible time trends in the correlation and dispersion between the commodity and the equity market. Secondly, we analyze the return-to-risk tradeoff and the mean-variance efficiency when adding commodities to traditional portfolios. We find no added improvement to the mean-variance efficiency or Sharpe ratio of traditional buy-and-hold equity strategies. Moreover, we find that there are no significant time trends between the MSCI world index and S&P GSCI all commodities return correlations in both USD and NOK. We also find that there are significant, but small, positive time trends in return correlations between the Oslo Exchange All Share and the S&P GSCI all commodities.