We found a match
Your institution may have access to this item. Find your institution then sign in to continue.
- Title
Personalized Inflation-Hedging Strategies.
- Authors
Cheng, Li; Todd, Schlanger; Victor, Zhu
- Abstract
Inflation-sensitive investors who have an explicit goal of hedging inflation in the short to medium term cannot rely on traditional portfolio optimization to achieve their desired inflation hedge because common frameworks focus on long-term wealth maximization and total return efficiency rather than an inflation-hedging objective. When it comes to measuring inflation, an investor's personalized consumption basket can also differ by archetype and result in anticipated spending needs that materially differ from broad measures of inflation such as the Consumer Price Index. In this article, the authors introduce a methodology to systematically construct portfolios through an expected utility of wealth maximization approach that is also tailored to an investor's personalized inflation rate (PIR) over the short to medium term. This framework can balance the likelihood that the portfolio will outperform an investor's PIR in the long run with the likelihood that it will achieve a specific beta to PIR in the near term. A novel framework is presented for how to calculate an investor's PIR and allocate to assets with greater inflation-hedging properties such as commodities and, to a lesser extent, Treasury Inflation-Protected Securities to hedge inflation volatility in the short to medium term or equities and other risky assets to grow the portfolio in excess of inflation over the long term.
- Subjects
INVESTORS; TREASURY bills; PORTFOLIO management (Investments); CONSUMER price indexes; EXPECTED utility; STOCKHOLDER wealth; PRICE inflation
- Publication
Journal of Portfolio Management, 2023, Vol 50, Issue 1, p46
- ISSN
0095-4918
- Publication type
Article
- DOI
10.3905/jpm.2023.50.1.046