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http://ssrn.com/abstract=316781
 
 

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Investment Strategy in an Inflationary Environment


Zvi Bodie


Boston University - Department of Finance & Economics

July 1982

NBER Working Paper No. w0701

Abstract:     
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.

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Date posted: June 8, 2004  

Suggested Citation

Bodie, Zvi, Investment Strategy in an Inflationary Environment (July 1982). NBER Working Paper No. w0701. Available at SSRN: http://ssrn.com/abstract=316781

Contact Information

Zvi Bodie (Contact Author)
Boston University - Department of Finance & Economics ( email )
595 Commonwealth Avenue
Boston, MA 02215
United States
617-353-4160 (Phone)
617-353 6667 (Fax)
HOME PAGE: http://smgnet.bu.edu/mgmt/profiles/BodieZvi.html
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