an assumption of excess return on one asset (or more generally on any one combination of assets such as a global equity index), and back out the implied views on all others. Purchases of an asset are warranted when the hurdle rate given by the implied view appears to be lower than one's view of what a reasonable value is. Conversely, sales are warranted when the implied view appears to be above a reasonable value. Implied views provide insight for deciding how large to make investments in an existing portfolio. There is, however, an additional layer of complexity that we have not yet reflected: the role of correlation in determining optimal positions. In the earlier analysis, the role correlation played, through its impact on portfolio risk and marginal contribution to portfolio risk, was not highlighted. In order to highlight the role of correlation, we extend the previous example by considering a new asset, commodities, which we suppose has volatility of 25 percent, and correlations of -.25 with both domestic and international equities. Consider again the original portfolio invested two-thirds in domestic equities and the rest in cash. If we consider adding commodities to this portfolio, the marginal contribution to portfolio risk of commodities, A , is -.066. Because domestic equity risk is the only risk in the portfolio, a marginal investment in commodities, which is negatively correlated with domestic equity, reduces risk. This negative marginal contribution to portfolio risk for commodities leads to a new phenomenon. Commodities are a diversifier in the portfolio. The previous type of analysis, where we sold domestic equity and bought enough international equity to hold risk constant, doesn't work. If we sell domestic equities and try to adjust the commodity weight to keep risk constant, we have to sell commodities as well. If instead we were to purchase commodities, then we would reduce risk on both sides of the transaction. Retain the assumption that the expected excess return on domestic equities is 5.5 percent and consider the hurdle rate for purchases of commodities, which is given by the expected excess return, ec, such that: rA " vA<y e -.055 = 0 (2.22) That is, f .150 ^ -.066 e -.055 = 0 (2.23)   -2.27-e -.055 = 0 (2.24)   e =-2.42% (2.25; Here we see an interesting result. When there is no existing position in commodities in this portfolio, the implied view for commodities is a negative expected excess return.