Why is it considered risky to invest in a commodity?

• A. Commodity prices are unaffected by global economic events.
• B. Commodity investments are insured against all market losses.
• C. Commodities always guarantee a fixed rate of return.
• D. Commodity prices are highly volatile due to unpredictable supply and demand factors.

Answer: (D)

Verified step by step guidance

1. Understand the nature of commodities: Commodities are basic goods used in commerce that are interchangeable with other goods of the same type, such as oil, gold, or wheat.
2. Recognize that commodity prices are influenced by supply and demand factors, which can be unpredictable due to weather conditions, geopolitical events, changes in production levels, and global economic shifts.
3. Acknowledge that this unpredictability leads to high price volatility, meaning the prices can fluctuate widely in short periods.
4. Realize that because of this volatility, investing in commodities carries a higher risk compared to more stable investments, as the value of the investment can change rapidly and unexpectedly.
5. Therefore, the riskiness of commodity investments stems from their price volatility caused by unpredictable supply and demand factors, not from guaranteed returns or immunity to market losses.