Question

Suppose Emma holds a well-diversified stock portfolio. Her son, Andrew, who is a portfolio manager, has just advised her not to invest in stocks of oil refining industry because their prices tend to have much higher volatility relative to other stocks. Is Andrew’s advice sound? Explain.

Answer 1

The prices of oil have recently shown that they are more volatile, and infact their prices in futures have even slided into the negative zone, that was completely unexpected because it has never happened before in the history of commodity market.

In this case, Emma already holds a well diversified portfolio and she wants to take exposure in oil ,I would recommend her to allocate very little amount of her portfolio into this commodity because this commodity is highly dependent upon the pricing fixation of various member nations of OPEC and it is highly fluctuating in nature so it could be more volatile than stock at times.

Since, her portfolio it already well-diversified she should not invest more into the commodity space, she should always be looking for investing a very little in order to gain from high volatility and she would be still hedged as her portfolio is well diversified and well allocated into various asset classes.

I would also agree with her son who is advocating against investment into oil wwhich has become very volatile in past few months