Maximizing Utility with Commodity Futures Diversification

Abstract

Previous research about commodity futures investing benchmarked to an unleveraged commodity futures index has demonstrated that it provides a source of valuable diversification for a portfolio of stocks and bonds. In this article, the author examines how investors risk behavior affects the portfolio allocation to commodity futures. Specifically, the investment behavior of a risk-averse investors is examined in light of the commodity futures allocation decision. It is found that the marginal utility of commodity futures investing is higher, the greater the risk aversion of the investor.