Portfolio Choice Under Inflation: Are Popular Recommendations Consistent with Rational Behavior?

23 Pages Posted: 4 Mar 2002

See all articles by Claus Munk

Claus Munk

Copenhagen Business School

Carsten Sørensen

Copenhagen Business School - Department of Finance

Tina Nygaard Vinther

SimCorp

Abstract

We consider the optimal asset allocation choice of an investor who can invest in cash (a money market bank account), nominal bonds, and stocks (the stock index). The investor faces an incomplete market setting and is not able to perfectly hedge long run real interest rate risk using the available securities. The optimal investment strategy is consistent with the following features of popular investment advice which have been pointed out as puzzles: (i) a decreasing fraction of stocks in the portfolio as time passes towards the investment horizon, and (ii) a higher bond to stock ratio for more conservative (less risk tolerant) investors (Canner, Mankiw and Weil, 1997). The model for asset price dynamics is calibrated to US market data and, furthermore, risk aversion parameters and time horizons are calibrated so as to obtain a match between the optimal asset allocations and observed investment recommendations for "aggressive," "moderate," and "conservative" investor groups with different investment horizons.

Suggested Citation

Munk, Claus and Sørensen, Carsten and Nygaard Vinther, Tina, Portfolio Choice Under Inflation: Are Popular Recommendations Consistent with Rational Behavior?. Available at SSRN: https://ssrn.com/abstract=302126 or http://dx.doi.org/10.2139/ssrn.302126

Claus Munk

Copenhagen Business School ( email )

Department of Finance
Solbjerg Plads 3
Frederiksberg, DK-2000
Denmark

HOME PAGE: http://sites.google.com/view/clausmunk/home

Carsten Sørensen (Contact Author)

Copenhagen Business School - Department of Finance ( email )

Solbjerg Plads 3
Frederiksberg, DK-2000
Denmark

Tina Nygaard Vinther

SimCorp ( email )

Weidekampsgade 16
DK-2300 Copenhagen S, 2300
Denmark
+45 35 44 64 75 (Phone)
+45 35 44 88 11 (Fax)

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