Partners healthcare case: Which is of commodities or real estate improve the risk return profile and the efficient frontier of the investments?

Question

BlackTom AI · Accepted Answer

Question context: Assessing which asset category (commodities or REITs) enhances the risk-return profile and the efficient frontier due to diversification benefits.
Option A: 'commodities help most because they offer the highest return.' This claim focuses on raw returns, not on diversification or correlation benefits. Commodities historically can be volatile and may not consistently offer the highest risk-adjusted returns, so claiming they provide the highest return without addressing correlations or risk is misleading.
Option B: 'REITs are better because they are less risky that n commodities.' The statement suggests REITs are less risky than commodities, but risk profiles depend on the period and measure used. Additionally, the rationale for improving the efficient frontier relies on diversification benefits and correlations with other assets, not just a relative risk label. This oversimplifies risk comparison and ignores correlation effects.
Option C: 'REITS are superior because they have higher return to risk ratio.' This option asserts a higher return-to-risk (Sharpe-like) ratio for REITs, which may occasionally be true in certain markets, but the question concerns how commodities or REITs affect the overall risk-return profile and frontier via diversification. Merely claiming a higher ratio does not address correlation structures with other assets and how that impacts the efficient frontier.
Option D: 'Commodities improve the efficient because they have lower average correlations than REITS with other assets.' This statement hits the core mechanism: diversification benefits come from lower correlations with other assets, which can shift the efficient frontier outward and improve the risk-return tradeoff when included in a portfolio. If commodities indeed exhibit lower average correlations with a broader asset set compared to REITs, they can broaden the frontier and potentially enhance risk-adjusted returns through diversification.
In summary, the key concept here is diversification: assets that exhibit lower correlations with the rest of the portfolio are more effective at reducing portfolio risk without proportionally sacrificing return, thereby improving the efficient frontier. Options A and C emphasize returns or ratios without addressing diversification benefits, and Option B relies on a simplistic risk comparison without discussing how correlations influence the frontier. Option D correctly identifies the diversification mechanism via correlation differences, aligning with the principle that lower correlations can improve the risk-return profile and the efficient frontier when including commodities alongside other assets.

BU.232.750.51.FA25 Final Exam Fall 2025- Requires Respondus LockDown Browser

Partners healthcare case: Which is of commodities or real estate improve the risk return profile and the efficient frontier of the investments?

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