“Black Gold”—Trading Crude Oil for Greater Portfolio Efficiency

Abstract

Commodity markets have proven to be a significant portfolio diversifying asset. However, little work has been conducted as to the statistical significance of this addition. We compare the addition of a commodity index to a traditional portfolio of stocks and bonds against the alternative of adding crude oil futures to serve as a commodity diversifier. We find that the value of such a simplification may be significant. By reducing the number of commodities used to gain portfolio diversification, investors may gain liquidity and flexibility. We run a similar test for gold which has been considered a key commodity diversifier during the inflationary periods of the 1970s and 1980s.