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A historical examination of optimal real return portfolios for non-US investors

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  • Bruno, Salvatore
  • Chincarini, Ludwig
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    Abstract

    The objective of this paper is to explore and identify inflation as it is embedded in a broad range of asset classes beyond simply TIPS, oil, gold and real estate. The analysis is conducted primarily from the perspective of investors in a range of countries that span the developed and emerging world including resource intense economies and those that have previously experienced hyperinflation. We find that an investor who is looking for a reasonable positive real return of 4.5% while minimizing the downside risk with respect to inflation will have an allocation that consists primarily of short-term bonds, longer-term bonds, some gold, some oil, and some emerging market equities. The weight of gold and oil together is less than 10% of the portfolio and is not always relevant for all countries. We find that achieving stable real returns during hyperinflationary periods is virtually impossible without access to a vast array of short-term fixed income instruments. Despite this, the out-of-sample performance of the real return optimizations is quite promising, providing an emulative inflation protection strategy for international investors of all sorts.

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    Bibliographic Info

    Article provided by Elsevier in its journal Review of Financial Economics.

    Volume (Year): 19 (2010)
    Issue (Month): 4 (October)
    Pages: 161-178

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    Handle: RePEc:eee:revfin:v:19:y:2010:i:4:p:161-178

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    Web page: http://www.elsevier.com/locate/inca/620170

    Related research

    Keywords: Real returns Inflation Hedging Asset allocation;

    References

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    1. Rapach, David E. & Wohar, Mark E., 2009. "Multi-period portfolio choice and the intertemporal hedging demands for stocks and bonds: International evidence," Journal of International Money and Finance, Elsevier, vol. 28(3), pages 427-453, April.
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    Cited by:
    1. Ihsan Ullah Badshah & Bart Frijns & Alireza Tourani‐Rad, 2013. "Contemporaneous Spill‐Over Among Equity, Gold, and Exchange Rate Implied Volatility Indices," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 33(6), pages 555-572, 06.

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