Publication: Optimal portfolio choice in real terms : measuring the bene ts of TIPS
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2011-01
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Abstract
In this paper, we solve an optimal portfolio choice problem to measure the bene ts of
Treasury In
ation Indexed Securities (TIPS) to investors concerned with maximizing
real wealth. We show how the introduction of a real riskless asset completes the
investor asset space, by contrasting optimal portfolio allocations with and without
such assets. We use historical data to quantify gains from availability of TIPS in the
presence of other asset classes such as equities, commodities, and real estate. We
draw a distinction between buy-and-hold long-term investors for whom TIPS fully
displace nominal riskfree assets and short-term investors for whom TIPS improve the
investment opportunity set of real returns. Finally, we show how gains from TIPS are
tempered by availability of alternative assets that covary with in
ation, such as gold
and real estate
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Portfolio choice in real terms, Treasury inflaction Indexed Securities (TIPS), Buy-and-hold long-term investors, Money illusion