Working Paper Series, Department of Finance, Copenhagen Business School
Claus Munk, Carsten Sørensen and Tina Nygaard Vinther
Portfolio Choice under Inflation: Are Popular Recommendations Consistent with Rational Behavior?
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 invest-
ment strategy is consistent with the following features of popular
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
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 di®erent investment
Keywords: Investment; Nominal bonds; Stocks; Market setting; Securities; Investment strategy; Risk; (follow links to similar papers)
JEL-Codes: G00; G10; G30; (follow links to similar papers)
23 pages, December 1, 2001
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