Agricultural - 2014 CFA Mock

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June06

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Is below statement correct? Please comment.
Agricultural commodities typically provide an expected offset to losses in such assets as conventional debt instruments in times of unexpected inflation.
 
I would say no, Agricultural Commodities are a bad inflation hedge. Storable commodities provide a better hedge (Oil, Gold, …)
 
Agree.
But CFA say YES (2014 start with Jacaranda, Duke case)
Confusing…
 
The key word is unexpected. Agricultural commoodities have a negative correlation with unexpected inflation.
 
^ yes. So as conventioanl debt.
But the statement says they can offset each other.
 
Schweser comment:
Non-storable commodities like agricultural commodities (e.g., livestock, wheat, corn) have shown values that are negatively (positively) affected by unexpected increases (decreases) in inflation. They have not provided diversification against unexpected inflation.
Inconsistent with 2014 Mock statement.
 
Btw, when will we consider long agricultural future?
No return enhancement (-2.47% p.a., from 1990-2004, curriculum number)
No diversification effect if unexpected inflation
….
 
June06 wrote:
No diversification effect if unexpected inflation
….
Click to expand...
You answered your own question. If there’s no diversification effect with unexpected inflation (i.e. it moves in the same direction as stocks and bonds), it does not offset losses from those asset classes
 
Would You Look at That wrote:
June06 wrote:
No diversification effect if unexpected inflation
….
Click to expand...
You answered your own question. If there’s no diversification effect with unexpected inflation (i.e. it moves in the same direction as stocks and bonds), it does not offset losses from those asset classes
Click to expand...
Yes, but CFA mock say it will, and it’s correct answer.
 
Do you ask questions just to argue with people? Ok… we can’t help you then. Has errata ever crossed your mind? Please, read the paragraph below exhibit 19 on page 54 of the alternatives reading.
“Stocks and bonds in exhibit 19 exhibit a negative correlation with unexpected inflation, as do some commodity classes (e.g. agricultural, livestock, and nonenergy).”
Edit: I think you need to go back and re-read the answer to that question. I think this is a matter of you misreading the provided answer than it is all of us or CFAI being wrong.
 
The answer reads, in part, “Although SOMEWHAT LESS so for AGRICULTURAL commodities than for energy, one of the principal roles that have been suggested for commodities in portfolios is as an inflation hedge during times of unexpected inflation […].”
 
Would You Look at That wrote:The answer reads, in part, “Although SOMEWHAT LESS so for AGRICULTURAL commodities than for energy, one of the principal roles that have been suggested for commodities in portfolios is as an inflation hedge during times of unexpected inflation […].”
Click to expand...
So u agree with CFA answer as wll as Schweser?
Schweser:

Non-storable commodities like agricultural commodities (e.g., livestock, wheat, corn) have shown values that are negatively (positively) affected by unexpected increases (decreases) in inflation. They have not provided diversification against unexpected inflation.
 
‘offset’ doesn’t mean fully offset.
Correlation between bond and agri is very little, -0.03, so agri has a role of risk reduction to a bond portfolio. This is the case suggested in theory despite the observation that agri is negatively related with unexpected inflation.
 
Miamia wrote:
‘offset’ doesn’t mean fully offset.
Correlation between bond and agri is very little, -0.03, so agri has a role of risk reduction to a bond portfolio. This is the case suggested in theory despite the observation that agri is negatively related with unexpected inflation.
Click to expand...
I didn’t say it would fully offset. However, an offset (of any size) to a loss, is some kind of gain. In the event of unexpected inflation, Agricultural commodities are not expected, nor have they historically, ‘offset’ the loss on bonds. And, the relevant correlation that matters is their respective correlations with unexpected inflation (-0.06 and -0.27 for bonds and agricultural commodities, respectively) in this instance.
 
Inflation is not an asset class (correlation is not dealt with the same way). An asset offsets inflation effect if it moves WITH inflation. ie, higher inflation leads to higher returns (in absolute term). This is an offsetting effect of inflation. for eg, TIPS are positively correlated with inflation, you use them to offset inflation effect.
 
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