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

  • Bruno, Salvatore
  • Chincarini, Ludwig
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    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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    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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