Hi,
I read that adding commody exposure to a traditional portfolio can reduce volatility of the portfolio because their returns are uncorrelated. Can some explain why? Also, adding a hedge fund to a traditional portfolio should reduce VOLT and increase return, right? Can someone also explain this?
That’s easy , just keep in mind the formula for portfolio standard deviation (assuming only 2 assets) and you will see that only 3rd component of the formula can reduce std.dev (=risk of the portfolio) and that is when correlation between the assets is less than 1. In other words all the assets that are not perfectly correlated can help reduce the risk of the potfolio