Investment Strategy in an Inflationary Environment
In: The Changing Roles of Debt and Equity in Financing U.S. Capital Formation
This paper addresses the issue of how an investor concerned about the real rate of return on his investment portfolio should allocate his funds among four major asset classes: stocks, bonds, bills and commodity futures contracts. It employs the Markowitz mean-variance framework to derive estimates of the pre-tax, real risk-return tradeoff curve currently facing an investor in the U.S. capital markets. Some of the major findings are: 1) Bills are the cornerstone of any low-risk investment strategy. The minimum-risk portfolio has a mean real rate of return of zero and a standard deviation of about 1%. The slope of the tradeoff curve is initially 1, but it declines rapidly as one progresses up the curve to higher mean rates of return. 2) Stocks offer the highest mean and are also riskiest. 3) Bonds play a prominent part in portfolios which lie in the midsection of the tradeoff curve, although not much would be lost if these instruments were eliminated. 4) Commodity futures contracts are the only asset whose returns are positively correlated with inflation. By adding them to the portfolios of stocks, bonds and bills, it is possible to achieve any target mean real rate of return with less risk.
(This abstract was borrowed from another version of this item.)
|This chapter was published in: ||This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number
11394.||Handle:|| RePEc:nbr:nberch:11394||Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
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- William C. Brainard & John B. Shoven & Laurence Weiss, 1980. "The Financial Valuation of the Return to Capital," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 11(2), pages 453-512.
- Merton, Robert C., 1980.
"On estimating the expected return on the market : An exploratory investigation,"
Journal of Financial Economics,
Elsevier, vol. 8(4), pages 323-361, December.
- Robert C. Merton, 1980. "On Estimating the Expected Return on the Market: An Exploratory Investigation," NBER Working Papers 0444, National Bureau of Economic Research, Inc.
- Brainard, William C. & Shoven, John B., 1980. "The financial valuation of the return to capital," Proceedings, Federal Reserve Bank of San Francisco, issue 4, pages 43-104.
- Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, 03.
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