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Preparing for higher inflation: Portfolio solutions using U.S. equities
Author(s) -
Parikh Harsh,
Malladi Rama K.,
Fabozzi Frank J.
Publication year - 2020
Publication title -
review of financial economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.347
H-Index - 41
eISSN - 1873-5924
pISSN - 1058-3300
DOI - 10.1002/rfe.1091
Subject(s) - economics , portfolio , hedge , inflation (cosmology) , indexation , index (typography) , volatility (finance) , equity (law) , econometrics , construct (python library) , financial economics , monetary economics , monetary policy , computer science , ecology , physics , theoretical physics , world wide web , law , political science , biology , programming language
Abstract Investors have always been interested in reducing inflation risk in their portfolios. However, investors face different types of inflation than those measured by the Consumer Price Index (CPI). Moreover, different asset classes can be used to hedge portfolio inflation. In this paper, we show how individual equities can be used to construct equity portfolios sensitive to customized inflation targets. We illustrate portfolios for three types of inflation: US headline CPI, Forbes Cost of Living Extremely Well Index, and the US Medical Care Price Index. We also show how alternative weighting schemes, such as minimum volatility and maximum inflation beta, can be used to construct inflation‐hedged portfolios.