Answer: Commodity index returns differ from the changes in the prices of their underlying commodities.

## Explanation **Correct Answer: C** Commodity index returns differ from the changes in the prices of their underlying commodities due to several factors: 1. **Roll yield/roll return**: Commodity futures contracts must be rolled forward before expiration. The return from this rolling process (contango or backwardation) affects index returns differently than spot price changes. 2. **Collateral yield**: Commodity indexes typically assume full collateralization of futures positions, generating interest income that contributes to total return. 3. **Rebalancing effects**: Indexes rebalance periodically, which can create returns different from simple price changes. **Why other options are incorrect:** **A. Commodity indexes commonly use an equal-weighting method.** - This is incorrect. Commodity indexes typically use production-based weighting, liquidity-based weighting, or other methods, but not equal weighting. Equal weighting is uncommon because commodities have vastly different production volumes and market values. **B. Commodity indexes in the same markets will share similar risk and return profiles.** - This is incorrect. Different commodity indexes can have significantly different risk and return profiles even within the same market due to: - Different weighting methodologies - Different rebalancing frequencies - Different roll strategies - Different composition and diversification For example, the S&P GSCI and Bloomberg Commodity Index (BCOM) both track commodities but have different sector allocations and weighting schemes, leading to different performance characteristics.

Author: LeetQuiz .