Whilst this isn't directly related to consulting, I assume a few readers may have more information than I and would be able to point me in the right direction.Thanks in advance.-----------------------------------------------------------------------I was recently given this scenario and would appreciate any advice as to how I would begin to approach and structure the answer.Currently in a totally unrelated field, looking to make the move into asset management.You're an analyst working with a family office. You're considering allocating 5% of the portfolio to commodities (current allocation is 0%), long-term view. You need to make the case for this to the fund manager.What are the advantages/disadvantages you would have to consider?Portfolio currently includes:- Property- Hedge Funds- Fixed Income- Private Equity- Cash- EquitiesMy first few thoughts were:- The family office can tolerate moderate risk as they have exposure to hedge funds and private equity, which are riskier assets than F.I and property.- Why diversification into commodities and why now?- Which commodities?I guess my first stumbling block was not knowing much about commodities or commodity indicies. Where would one go to find appropriate indicies that would help with this case? I was thinking of overlaying an MCSI/S&P chart with the S&P GSCI.Any input would be great.

These credit crunch people already forgot what happened...

The case for is that historically commodities have outperformed equities and looking at a long term view would make a sensible investment since the general trend is that the world is using more energy and producing less (last 12 months excepted). This means in the longer term commmodities wil be more scarce as the supply demand fundamentals once again become out of kilter and prices will move up.Was this a job interview? Who with?

Just don't make like Lehman and tonk $30m in some illiquid uranium birquettes (or similar).

Tell them the honest truth. It's a game. It's a lottery. Tell the client to go manage their own money - they stand a better chance of getting a return that way as they will have one less monkey on their back.

"historically commodities have outperformed equities"I have the feeling that this is true, however, my evidence to prove this is limited, do you know of any other resources outside of the S&P GCSI or the DJ-AIGCI ?

Suggest you also look at how commodities are correlated with other investments.I guess they are not well correlated and therefore will lower the risk of the portfolio.

formulate a vector of size n with expected average returns for each investment strategy. Then formulate a matrix of n by n size with the covariance of each investment strategy with respect to the others. finally, set up a vector for your answers which is [w1, w2...wn] called a weight vectortotal return = weightvector . returnvectortotal std = sqrt of weightvector . covariance matrix . weightvectorfind the maximum of total return - total std to the 2nd power divided by twothatll give you w1, w2 ...wnbreak up your portfolio like that...what a waste of knowledge