Chartered Financial Analyst Level 2
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26 An investor believes that commodity prices tend to trend and wants to invest in a commodity index that is not dominated by any one commodity. It would be most appropriate for this investor to choose an index that is:
Exam-Like
A
equal-weighted and rebalanced annually.
B
production-weighted and rebalanced monthly.
C
production-weighted and rebalanced annually.
Explanation:
Explanation
For an investor who:
- Believes commodity prices trend
- Wants an index not dominated by any one commodity
The most appropriate choice is A: equal-weighted and rebalanced annually
Why equal-weighted:
- Equal weighting ensures no single commodity dominates the index
- Each commodity has the same weight, providing diversification
- This prevents concentration risk in any single commodity
Why annual rebalancing:
- For trending markets, less frequent rebalancing is better
- Annual rebalancing allows trends to play out
- More frequent rebalancing (monthly) would cut off potential trends prematurely
Why not production-weighted:
- Production-weighted indexes can be dominated by commodities with high production volumes
- This contradicts the investor's goal of avoiding domination by any single commodity
Therefore, A: equal-weighted and rebalanced annually best meets both criteria.
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