Development and Evaluation of Markowitz’s Portfolio Selection Model in the Commodity Market

Abstract

This paper empirically proves whether Markowitz’s portfolio selection model, which has proven superiority in the stock market by several previous studies, is also valid in the commodity market. We analyzed the performance of portfolio in terms of returns and risks using major commodity indices and stock market indices as benchmarks. The proposed model was composed of 22 commodities over the past 21 years from 2001 to 2021, and the rate of return and the covariance were calculated by applying the exponentially weighted moving average (EWMA). The optimal portfolio weights were determined based on the minimum expected return calculated dynamically according to the market situations. As a result, the performance of commodity investment applying the portfolio selection model showed the superior results compared to the benchmarks. In conclusion, investment through the portfolio selection model proposed in this paper can expect higher performance than the global indices tracked by many financial products, suggesting that the commodities can be a complementary alternative investment with the stocks.