Agricultural commodities

[johntavv]

Which is least likely correct:
1. Agricultural commodities can increase expected return relative to a portfolio composed of only traditional investments.
2. Agricultural commodities typically provide an expected offset to losses in such assets as conventional debt instruments in times of unexpected inflation.
Answer says: justification 1 is least likely correct since agricultural commodities do not necessarily increase the expected portfolio return. 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.
I thought agricultural commodities were negatively affected by unexpected inflation, so why is justification 2. correct?

 

[AlmostDoneIII]

They provide inflation hedge but not in the event of unexpected inflation hedge. They do provide inflation hedge against losses in bonds in the event of unexpected inflation.
Key word was debt instrument that changed it making it correct

 

[ajb1]

@AlmonstDone - don’t understand your response. Are you saying agricultural commodities provide an inflation hedge to unexpected inflation, so #2 is actually stated correctly?
I thought energy and precious metals provided the inflation hedge? The reason #2 is least likely correct is because it says agricultural commodities, instead of energy or precious metals.

 

[AlmostDoneIII]

ajb1 wrote:
@AlmonstDone - don’t understand your response. Are you saying agricultural commodities provide an inflation hedge to unexpected inflation, so #2 is actually stated correctly?
I thought energy and precious metals provided the inflation hedge? The reason #2 is least likely correct is because it says agricultural commodities, instead of energy or precious metals.

Yes i’m saying #2 is correct.
When bonds go through unexpected inflation, interest rates rise. When interest rates rise, conventional debt instruments (bonds) poop all over the place. When this happened agricultural commodities provides a hedge to bonds.

 

[MrSmart]

The question is pretty poor, number two should be wrong. It’s clearly stated that there is a negative correlation between non-storables and unexpected inflation, if it were no correlation, or a slightly positive one, it would at least provide a partial hedge.
I’d take this with a grain of salt.

 

[AlmostDoneIII]

MrSmart wrote:
The question is pretty poor, number two should be wrong. It’s clearly stated that there is a negative correlation between non-storables and unexpected inflation, if it were no correlation, or a slightly positive one, it would at least provide a partial hedge.
I’d take this with a grain of salt.

I don’t think the question is poorly stated at all. it’s one of those things that is covered in the book in 1 sentence. Wording is just fine, this is just one of those CFAI curveballs where you’ll get it wrong unless you remember every little detail. In other words it’s meant for 95% of people to miss. But it’s a fair question cause it’s stated in the book

 

[MrSmart]

AlmostDoneIII wrote:

MrSmart wrote:
The question is pretty poor, number two should be wrong. It’s clearly stated that there is a negative correlation between non-storables and unexpected inflation, if it were no correlation, or a slightly positive one, it would at least provide a partial hedge.
I’d take this with a grain of salt.

I don’t think the question is poorly stated at all. it’s one of those things that is covered in the book in 1 sentence. Wording is just fine, this is just one of those CFAI curveballs where you’ll get it wrong unless you remember every little detail. In other words it’s meant for 95% of people to miss. But it’s a fair question cause it’s stated in the book

It’s stated in the book differently from the answer in the OP.
I don’t exactly remember, but I’m pretty sure there was a negative correlation between them and unexpected inflation, not a weaker positive one.