The mixed asset portfolio are prior
providing the investor to hedge against
inflation
The minimum of risk aversion for investors to hedge inflation
Haibin Yin
s690345
Pre-Msc: International Business
5/26/2011
Bachelor Thesis
Supervisor: Juan Miguel Londono
Table of Content
Executive summary
3
Chapter one: Introduction
4
Chapter two: the financial assets hedge against the inflation
2.1 invest the common stock to hedge inflation
2.2 connects the Treasury bills to hedge inflation risk
6
7
Chapter three: to hedge against inflation by the real asset investment
3.1 The real estate hedge against inflation
3.2 The commodities link to hedge the inflation risk
9
10
Chapter four: Methodology and empirical evidence
4.1 The return of stock and empirical results
4.2 Treasury bills and empirical evidence
4.3 The real estate trusts and empirical evidence
4.4 Gold and empirical results
12
13
14
15
Chapter five: Conclusion, Discussion, and Recommendations
17
Reference lists
18
Appendix
22
2
Executive summary
In order to reflect the minimum risk aversion to the investors for hedging inflation,
the exiting literatures are often suggest to the same real asset, they look like the stocks,
the real estate, the bonds and Treasury bills, the gold are independently consist of the
kind of portfolio to hedge the expected and unexpected inflation. But at the current
society as a whole may benefit or lose from inflation, to extent that the potential risk
costs in a rational market. A focus on the strategic mix asset portfolio could be
investigated in this research. The vital importance of external resources in moving the
individual investors toward increased the maximum return from the investment and
decreased the risk costs were from inflation. This research is base on the related
literature to investigate the role of resources for hedging inflation, regard as the mix
asset portfolio are prior providing the individual investors to hedge against inflation in
the long run.
3
Introduction
That global financial crisis has already gone for three years, with the stock price, the
real estate price and commodity price are also experiencing record level, and the
inflationary pressures are still on the high-order. Just to investors, they solely focus
upon the real purchasing power of their returns, as a worry is the risk of inflation for
them by Gorton and Rouwenhorst (2006) mentioned. Through extension of this
statement that declaring many asset portfolios are providing the investor hedge
against inflation over the short-and medium-term horizon.
As a matter of fact, the investors are always aims at the financial asset portfolios
correlated with common stocks and bonds that provide reasonable average returns,
and that are at least partially hedged the inflation, and confirmed by Kenneth, (1995).
And financial assets ought to be valuable for portfolio diversification because widely
diversified portfolios of common stocks and bonds are strongly negatively correlated
with inflation, Bodie, (1976) and Fama, (1981). Actually, in the early of 1930, Fisher
noted the hypothesis that was the observed relation between stock prices and inflation,
and thus stock returns and changes in inflationary expectations with Fisher hypothesis,
(1930). And there have a lot of existing literatures on the relation between stock
returns and inflation, empirical evidence of several economists suggests that real stock
returns are adversely affected by both the expected and unexpected components of the
rate of inflation by Fama, (1981). At the same time, Geske and Roll, (1983) were also
mention; when the expected rate of inflation is reflected in the stock price,
consequently, the assumption that is reflected there is that price is expected to be
neutral in the monetary sector by the equilibrium process. What is more, Gautam,
(1986) claimed these relations were following in a systematic manner depending on
the influence of money demand and supply factors. And they explained the relation
between stock returns and inflation merely point at the role of the central government,
according to them higher or lower than expected stock market returns cause a chain of
macroeconomic events. By Fama (1981) for common stocks, suggests that the
variation in expected real returns on financial assets is more fundamentally due to the
capital investment process than to variation in expected inflation.
Not only that the financial asset portfolio correlated with the common stocks and
bonds could hedge the inflation, but also the price of real estate can also hedge the
inflation, and has been identified by many investors, the evidence suggestions from
Bodie, (1976): Nelson (1976) and Fama and Schewert (1977) mentioned and provided
the changes in returns on private residential real estate are positively related to
changes in inflation, it can be say that the inflation could be hedged by the real estate.
But Hartzell, Hekman, and Miles (1987) made a research and provided related
evidence that a diversified portfolio of commercial real estate could as a complete
hedge against inflation over the period of 1973-1983.
4
We ultimately think about that is standing at the foot of investors, when they have
some remaining money for investing or start to manage money matters, no matter put
the money on the financial market, the real asset market of having a huge room for
value-added, etc. at least they hope that their expectation value of money to increase.
But in fact, it seems that no more than they expected, because they have to
compensate the inflation rate and they want to get the higher profits than they should
have done on investment for the extra risk they undertake. Especially in fearful
financial tsunami, the investors are only base on the common stocks, bonds and the
investing of the real estate correlated with portfolio are not enough for hedging the
inflation in the short term, Edward, (2009).
Before, Strongin & Petsch, (1997) claimed the investors’ asset have examined in their
research, only commodities and provided significant protection against the inflation
risk inherent and generated considerable returns in the standard portfolio. And
Blomberg & Harris, (1995) was suggesting the commodity; in particular, in terms of
gold that provides investors with a hedge against the inflation. Draper and Faff, (2006)
claimed that precious metals exhibit inflation hedging capabilities especially
throughout periods of abnormal stock volatility, and Daly, (2005) were also support
the gold have been held throughout history as a form of protection against inflation,
such as political turbulence, and financial turmoil.
What is more, which is important about inflation refers to as when the purchasing
power of a nation falls due to a rise in overall prices level. Today, most economists
favor a low steady rate of inflation, because the low inflation may reduce the severity
of economic recessions by enabling the labor market to adjust more quickly in a
downturn, specially, after the financial turmoil passed and reduce the risk that a
liquidity trap prevents monetary policy from stabilizing the economy by Hummel,
(2007). Regard with the related literatures, this paper will start with giving the
research about the mix asset portfolio are prior providing the individual investors to
hedge against inflation in the long run, in other words that the financial products, the
real estate and commodities (precious metals) correlated with portfolio together are
better prior providing the investors to hedge the inflation than invested one of them,.
First chapter is the introduction chapter. Second chapter will state the relation of
financial assets and inflation, and will deep analysis how it hedge against inflation,
and will explain the indivisible relation between the real estate and inflation in chapter
three, and depend on the results from the related literatures, will mention a kind of
connect between the commodities (precious metals) and inflation, and how does it as
an inflation hedge in chapter four. The following chapter is the methodology and the
empirical evidences from the related literatures. After that, the effects of financial
assets, the real estate and commodities (precious metals), what’s kind of portfolio is
better hedge inflation will be studied in order to come to a conclusion in the last part.
5
Chapter two: the financial assets hedge against inflation
2.1 Invest the common stock to hedge inflation
If we investigate the relationship between common stock and inflation, we have to go
back the original idea relating the nominal interest rate to expect inflation is
commonly attributed to Irvin Fisher. He asserted that the nominal interest rate consists
of a “real” interest rate plus the expected inflation rate. And he hypothesized that the
expected real return on interest rates is depended on the productivity of capital and
time preference of savers, and is independent of the expected inflation rate. And Fama
and Schwert, (1977) had already provided Fisher Hypothesis, about interest rates can
be generalized to all assets in efficient markets and that stock returns were negatively
related to expected, unanticipated inflation and changes in expected inflation.
Following the Fisher hypothesis, which stated that the market is efficient and that the
expected real return on common stocks and the expected inflation rate very
independently, it can be obtained from the estimates of the following regression
model:
is the nominal return on common stocks
is the inflation rate.
t denotes returns between the time period t-1 and t.
is the information set that investors use in forming their expectations.
E is the mathematical expectations
This regression model estimates the conditional expected value of the stock market
return as a function of the expected inflation rate. The coefficient of
which is
consistent with the expected nominal return on common stocks varies in one by one
correspondence with the expected inflation rate, as a result, the expected real return
on an asset is equal to its expected nominal return less the expected inflation rate. N.
Bulent Gultekin, (1983) provided these tests of regression through the monthly
inflation rates for individual countries in the long run from 1947 to 1979 by data
source. And there have also some literatures about the Pigou real wealth effect to
explain that the real interest is negatively related to expected inflation. Mundell, (1963)
and Santomero, (1973) has showed that changes in the growth rate of the labor force
or productivity may give rise to a direct relation between the expected real rate and
expected inflation.
Review of the literatures of Jaffe and Mandelker, (1976) and Nelson, (1976) also
found a consistent negative relation between stock returns and expected inflation as
well as unanticipated inflation. When the poor of stock prices to rise during a decade
of substantial inflation; Martin, (1980) indicated that this inverse relation between
higher inflation and lower stock price during the past decade was not due to chance or
6
to other unrelated economic events. Later in the finance literature of Ben Branch,
(1974) and Phillip Cagen, (1974) had investigated the relation between stock prices
and inflation in other countries using the cross-sectional analysis, got the result of
stocks return were a partial inflation hedge and it were an inflation hedge for a
long-term holdings. It viewed the common stocks correlated with portfolio are also
partial inflation hedge in short or middle term.
2.2 connects the Treasury bill or the zero coupon bond to hedge inflation risk
If the stock prices could be hedge a partial inflation in short run, in addition to this,
Jayendu and Richard, (1987) claimed the Treasury bill and the zero coupon bond are a
nice choice with common stocks together in the financial market for hedge the
inflation in short time. It was according to that Fisher Hypothesis, (1930) applied to
Treasury bill yields and the unbiased expectations hypothesis applied to prices of
Treasury bill futures.
Graph 1: The U.S. Treasuries bill
Source: from www. Bloomberg.com
Separately, from the three month, six month, one year to thirty years
In the financial market, the investors are not certainly forecast the expectation of
financial market in totally, such as the move towards of single stock price at this
moment, the trend of an Treasury bill in some day, the raising of risk rate of inflation
in which’s clock, etc. but the investors can depend on the portfolio (includes the
stocks, Treasury bill and bonds) management for hedging the risk of inflation, or
systematic jump risks in asset returns. Jayendu and Richard, (1987) claimed the
Treasury bill futures can reduce single-period inflation risk by about 30-40% in the
empirical analysis. In that way, there are also as the partial hedging inflation. So here
we continually introduce a kind of bond named zero-coupon bonds used to hedge
particular types of jump risks faced in these financial markets. The zero-coupon bonds,
which is a bond bought at a lower price than its face value, with the face value repaid
at the time of maturity. Robert and Jose, (1991) were based on the returns on U.S.
government bonds and related securities, and recognized they were also suffered from
7
the pressure of inflation threat, and as a critical variation in these returns to
distinguish the systematic risks that have a general impact on the returns of most
securities from the specific risks that influence securities individually and hence have
a effect on a diversified portfolio, through the duration analysis to estimate the general
level of interest rates affects prices of fixed-income securities. As same as the returns
of the Treasury bill, they are also the partial hedging inflation in the single-period.
8
Chapter three: to hedge inflation by the real asset investment
3.1 The real estate hedge against inflation
When the return of real estate was following the rates of inflation climbed through
compare the graphs of private housing-price index and the history inflation, in
conjunction with the methodology of Fama and Schwert, (1977) and Geske and Roll,
(1983) to investigate whether real estate securities continue to act as a perverse
inflation hedge, and most studies investigate the relationship between returns on Real
Estate Investment Trusts (REITs) and anticipated inflation. It was motivated by the
contradictory findings in the literature concerning the inflation-hedging characteristics
of real estate securities. Geske and Roll, (1983) and Titman and Warga, (1989) tested
that stock returns inclusive of REITs are the catalyst to changes in fiscal and monetary
policy, which in turn cause an opposite change in the rate of inflation. Under this
proposition, a significant positive correlation with unanticipated inflation while the
real estate could have had high unexpected returns,
We look at the following the graphs, hope that we have a image in our brain for
helping to make the structure of linear to analysis the relationship between the real
estate and the inflation.
Graph 2: inflation-adjusted U.S. home price index (red line)
Source: from Wikipedia, the free encyclopedia
9
Graph 3:
Median and Average Sales Prices of New Homes Sold in the US 1963-2010 Monthly
Source: from Wikipedia, the free encyclopedia.
If we are simply look the price change of house in the real estate market, up or down
of price in changes, it was difficult understand the reason of why the price will raise
while the inflation will climb a little high level. But according to that (Jeong and
Donald, 1990) mentioned there have three types of REITs, separately the mortgage
trusts primarily hold long-term mortgages, but many also engage in short-term
construction financing. Equity trusts take an ownership interest in commercial
property such as shopping centers, office headquarters, and so on. Since there is a
difference in the real estate assets across the types of REITs, we shall examine the
hedging capabilities of choosing one type as well as the overall hedging performance
of REITs in general. Thereby, it could help to get the conclusion of relationship
between the real estate and inflation.
Base on the real estate securities varies in the U.S and U.K., Because the equity
REITs is closed end investment companies which invest the bulk of their wealth in
U.S equity real estate as a good proxy (Crocker, David and Martin, 1997), it is
different situation in U.K that some real estate securities should be a good reflection
of the real estate market while others are more representative of the stock market. We
shall make a Data collection mainly in U.S real estate market from the related
literatures.
3.2 The commodities link to hedge against inflation
As mentioned earlier chapter one will deal with the inflation hedging properties of
various commodities, gold in particular. (Daly, 2005) stated the gold has been held
throughout history as a form of protection against inflation, and it has already tested
in war, political turbulence and financial crisis. From the characteristic of gold to state,
durable, relatively transportable, easily authenticated and universally acceptable, and
(Worthington and Pahlavani, 2007) declare that the hedging quality of gold depends
10
on a stable long term relationship between the price of gold and the rate of inflation.
Graph 4: Historical gold price in Dollar and inflation adjusted gold price in USD
Source: from www. realTerm.de
From 1960 to now, noted the gold price in Dollar and as an efficient inflation hedge adjusted gold
price.
This graph could provide a suggestion that direct and indirect gold investment can
provide investors with efficient hedge inflation in the long run, but it is also
characterized by significant in short run price instability (Strongin and Petsch, 1997).
And (Solt and Swanson, 1981) mentioned the gold has demonstrated to be a hedge
against inflation and the negative correlation of gold returns in the financial market, in
other words, the addition of gold holdings to a portfolio would have reduced the
standard deviations of the portfolio’s return. I will deep analysis and take the past
research into account the gold as an effective and the safest investment provide
investors hedge against inflation, and if as the gold as the addition of holdings to a
portfolio if would reduce the standard deviations of the portfolio’s return in following
chapter by the methodology and data research in the long run. In other words, the gold
as the commodity futures contracts reduces risk because cash and future prices for the
same commodity are likely to move together, so that alterations in the value of a cash
position are counterbalanced by alterations in the value of an opposite futures
positions in the research of Moschini, (2002). In addition to that Chance, (1994)
observed the correlation is marked by significant instability, and laid a shadow of
doubt over the use of commodity futures as a consistent diversification vehicle.
11
Chapter four: methodology and empirical evidence
4.1 measure method of the return of stock and collection data
There have a lot of models will test the relationships between the stocks return,
government bonds, Treasury bills, the gold and inflation. By the Fisher Model (1930),
he stated the nominal interest rate =real interest rate +expectation inflation for
reacting the relationships between the stock return and inflation. And it can be
obtained from the estimates of the following regression model:
Where:
is the nominal return on common stocks
is the inflation rate.
t denotes returns between the time period t-1 and t.
is the information set that investors use in forming their expectations.
E is the mathematical expectations
This equation was definite the relationship between the nominal interest rate and the
rates of inflation subsequently observed. We know that the stock return could be seen
as the total return to the shareholder, so the regressions of stock returns on
contemporaneous rates as proxies for expected inflation (N. Bulent Gultekin, 1983).
The data sources that we can collect the recent data correlated with the monthly
inflation rates and the stock market indices for individual countries from the data
stream software in the library. In other way, we have reviewed the data research of N.
Bulent’s paper, (1983), collected monthly inflation rates for individual countries from
January 1947 to December 1979 and are calculated by the percent changes of the
consumer price indices in International Financial Statistics (IFS). And it reported
stock market indices for about 26 countries from Jan, 1947 to Dec, 1979, about nearly
60% of the market value of all shares traded in the most active stock exchange of the
country. The second data sources is Capital International Perspective (CIP), are also
base on the Swiss investment services firm provided the stock market indices and
included 1100 share prices listed on the stock exchanges of 18 countries. And then by
using the contemporaneous inflation rates as proxies and the short-term interest rates
to estimates the expected inflation rate.
Empirical evidence comes from the related literatures
Reviewed the paper of N. Bulent, (1983), the empirical results were checked by many
kinds of methods; the regression slope would be depressed further and could even be
negative. And a difficulty with using the ARIMA models to forecast inflation for
longer periods is that for most of the countries, considering the inflation rates were
more volatile in the short period. At last, the author proved these coefficients of
regression for the expected inflation rate are negative, and indicated a stronger
12
negative relation between stock returns and expected inflation and positive for the
unexpected inflation through the further verification. But N. Bulent also found that the
relation between the stock return and inflation is not stable over time and that there
are differences among countries.
If we referred to the recent literature of Paul, (2009) that got the conclusion the
common stocks provide a hedge against inflation in Kenya, Nigeria and Tunisia, and
the dataset consists of monthly stock price indices and consumer price indices come
from six African countries between 1991 and 2006. So the kind of negative relation
with expected inflation was just satisfied in three of the six countries. It is obviously
that we reviewed the related literature and found the potential risk problems, because
the stock return is partial hedging inflation in the short run.
4.2 measure method of Treasury bill and collection data
Moreover, in the Treasury bill market seems to be efficient in the sense that nominal
interest rates summarize all the information about future unexpected inflation rates
that is in time-series of past inflation rates by Fama, (1975) has shown that Treasury
bill returns can be used as predictors of unexpected inflation in the U.S. In other
words, this is not present in the single-period situation, but according to the
multi-period hedging inflation, Jayendu and Richard, (1987) also stated the Treasury
bill as a desirable unexpected inflation hedge and its inclusion does not reduce the
expected real return of the individual’s portfolio.
Through review the literature of Jayendu and Richard, (1987), the nominal return
from the end of month t-1 to the end of month t on a Treasury bill with one month to
maturity at t-1 is
Where
is the price of the Treasury bill at t, and
is its price at t-1.
Since the Treasury bill has one month to maturity at t-1, once
is set,
is
known and can be interpreted as the one month nominal rate of interest set in the
market at t-1 and realized at t. In the context of their proposition, also based on the
Consumer Price Index (CPI) and GNP (Gross National Product) deflator to measure
the relation between the Treasury bill and the unexpected inflation, and data come
from the related data of the statistical bureau by the regression model in the following
part,
Where,
is a measure of unexpected inflation,
is the cash flow arising from a
long position in a Treasury bill futures contract over period t.
13
Empirical evidence comes from the related literatures
By the review the empirical evidence of Jayendu and Richard’s paper, (1987) got the
result of
is negatively correlated with inflation risk measured by unanticipated
changes in the CPI and with unanticipated changes in the GNPD. But in the
multi-period time series of expected inflation hedging, the result is not remarkable.
Thereby, get the empirical evidence of Treasury bill can reduce about 30%-40% risk
of inflation, to confirm the goal of keeping the lowest inflation risk for investment
return of the investors.
4.3 Measure method of real estate trusts and collection data
It aimed at the different country perspective by the different model could be used to
examine the relationship between asset returns of real estate and actual, expected and
unexpected inflation. Crocker, David and Martin, (1997) brought out three proxies for
expected inflation are the lagged return on short term government yields, and (Fama
and Gibbons (FG), 1982) measure of anticipated inflation, and a proxy for expected
inflation generated by an ARIMA process.
Where:
is one of the three proxies for anticipated inflation
STY is short term yields are used in lieu of rates since the former is ex ante while the
latter is an ex post result.
The following model is used to ascertain each proxy’s effectiveness as a predictor of
own country inflation:
Where
unity.
is the inflation rate for a country in month t, and
should be equal to
We can depend on the three inflation types and for each of the assets, the following
these equations were estimated:
For actual inflation:
For expected inflation:
For unexpected inflation:
Where:
= nominal return on asset j from time t-1 to t.
14
=actual inflation rate as measured by the Consumer Price Index from time t-1 to t.
=expected inflation rate as estimated by the Livingston survey from t-1 to t.
Certainly, Crocker, David and Martin, (1997) the data is mainly base on the monthly
returns on property unit trusts and capital market indices are given by Australia,
France, Japan, South Africa, Switzerland, U.K. and the U.S. and include other related
source of the CRSP database, is also the Interactive Data Corporation (IDC) and
Australian Stock Exchange (ASX) data collection.
Empirical evidence comes from the related literatures
According to that Box and Jenkins (1976) mentioned the time series analysis method
to implement tests of asset return of the real estate as hedges against expected and
unexpected inflation.
By the review of literature, the first test result of Crocker, David and Martin (1997)
shows none of the expected inflation proxies dominates across Australia, France,
Japan, South Africa, Switzerland and United kingdom in the research results between
February 1980 and March 1991. Although in general, results are consistent across all
expectations proxies. But there does not seem to be a systematic “causal economic
relationship” between either inflationary expectations and real estate stock prices, or
revisions in inflationary expectations and stock prices, except in the U.S.
The second test result from the Fama-Schwert tests of nominal returns on expected
and unexpected inflation are show weak relationships between nominal real estate
stock returns, because in most cases, estimated coefficients are negative. If by using
nominal asset returns and inflationary expectations, the relationship is negative and
significant only for the U.S.
What is more, when the third re-estimating the tests show beside South Africa, there is
a negative relationship was showed between expected inflation and real estate stock
returns, leading to the conclusion that real estate stocks which trade on public markets
in these countries exhibit the same inability to hedge against expected inflation as do
common stocks, Crocker, David and Martin, (1997). In result, the research has shown
that real estate securities act as a perverse hedge against inflation and its expected and
unexpected components in most countries. However, returns on property trusts do
appear to provide better predictions of future inflation relative to common stock
returns. What is more, to invest the real estate stock to hedge inflation could be
brought into the category of common stock return for hedging inflation, so it is not
enough reduce inflation risk in short run, regard as the long term investment return
from the related literatures researched. If the individual investors join the real estate or
commodity house trading in the public housing market, lack a kind of universality in
many countries.
15
4.4 Measure method of gold and collection data
Through a linear regression model developed by Hillier, Draper and Faff, (2006) and
Chua and Woodward, (1982) will be conducted this research. This regression model
will focus on the inflation hedging properties of gold. Through the dependent variable
and independent variable to set up the structure of relation between the dependent and
independent variable, mainly estimate the research will focus on the actual or
expected inflation. To collect monthly price of gold, monthly value of S&P 500 and
monthly return on S&P 500 and the monthly inflation.
Here we are base on the methodology of Dirk and Brian, (2006) tested these related
hypotheses by using a dynamic regression model to compare with the stocks and
bonds price for the entire sample period.
Where,
,
and
are the return of gold, stock and bond
prices in the period of t, and the all parameters of
and . The rest of part is the
terms
and
account for asymmetries of positive and negative
shocks and are included in the q’th falling stock and bond markets.
Empirical evidence comes from the related literatures
The empirical results come from Michael, (2010) show that gold is not an effective
inflation hedge for investors of United States and it does not protect US investors
from inflation in the long run. In addition, since the gold returns emulate the inflation
except the emulation is not sufficient enough to cover the real costs of inflation in the
US, gold could serve as a potential hedge to compensate investors for losses with
stocks thereby positive at times of economic uncertainty. What is more, with the graph
4 shows that inflation goes up, the price of gold goes up from 1970 to 1980, and
following the inflation went down, however the returns on gold did not experience
such a decline for investors considered it is a safe investment.
Through the literature review, towards gold being an inflation hedge the empirical
results did not confirm it in neither of the investigated periods, Worthington and
Pahlavani, (2007). Therefore it could be possible that at times of economic
uncertainty gold could serve as a potential hedge in the future.
16
Chapter five: Conclusion, Discussion, and Recommendations
5.1 Conclusion and Discussion
In this paper, through the existing literatures has shown that the common stock, the
Treasury bill, the real estate and gold act as a perverse hedge against inflation and its
expected and unexpected components in most countries. Nevertheless, the fisher
assumption that a rise in inflation will be represented in the nominal price of a stock,
but it does not have any effect on the real yield of a stock. In the incomplete market,
the real return made on a stock will not be influenced by a rise in inflation. But it is
difference in the complete and dynamic market; the related empirical evidence
suggests and indicated the stock returns have a stronger negative relation with the
expected inflation and positive for the unexpected inflation, and found the potential
risk problems about the stock return is partial hedging inflation in the short run, not at
all hedging. In the meantime, the government bonds and Treasury bills are hedges
against unexpected inflation in multi-period time series and can reduce about 30%-40%
risk of inflation, not reach the goal of keeping the lowest inflation risk. If the
individual investors join the real estate or commodity house trading in the public
housing market, and lack a kind of universality in many countries. At the same time,
the related empirical evidence showed that gold is not sufficient enough to cover the
real costs of inflation in the US.
Above the all of evidences from the reviewed of literatures, and it base on the
considering of the investor does focus upon the real purchasing power of their
investment returns, the dispersibility investment could be seem as an effective
hedging against inflation risk. The mix asset portfolio named by the common stock,
Treasury bills, the real estate or related trusts and the commodities (Gold) are consist
of investment portfolio to hedge against inflation in the long run. The young people
will start working and manage their money matters, all of them hope that their
expectation value of money to increase for facing the loss and risk of expected and
unexpected inflation in uncertainty economy. Therefore, the intersect-mix (reticular)
investment portfolio could be approved by reduce the risk of inflation.
5.2 Recommendations
Fama noted that inflation can be used as a proxy for economic activity. Nevertheless,
it has a negative effect on economic activity and the proxy hypothesis states that
inflation has a negative effect on stock returns by economic activity is positively
related to stock returns. So some recommendations for the individual investors that
can invest some money on the stock market, to buy the two-three common stocks and
holding one-two stocks in the long run, the rest one can freely trade in the short or
middle. At the same time, to collect the gold product act as the investment protection
for reducing the bigger risk of inflation, and join the trading of Treasury bills from the
government and grasp the chance of investing the real estate. Thereby, to roll your
money and get the biggest return in the process of hedging inflation in the future.
17
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21
Appendix
The percent change in the yearly CPI beginning in 1920
The CPI in dollar terms (assuming $1.00 at the beginning of 1920)
22
Source: from www. allfinancialmatters.com
Notice how the CPI really turns up around the mid-70s. Just as interest on a bank
account compounds, so does inflation.
23