1. What effect do you think an increase in real interest rates has on the price of TIPS? What about increases in realized inflation? How about increases in expected inflation? An increase in inflation risk? Are those effects different for a regular T-bond?

2. How can you combine regular (nominal) Treasuries and TIPS to build a hedge portfolio that has exposure to inflation risk, but not to real interest risk?

3. What do HMC’s Capital Market assumptions imply for US and foreign market risk premia? What do you think about those?

4. What are HMC assumptions about the expected real returns on TIPS, its volatility, and its correlation with the real returns on the other asset classes? What do they imply about the correlation of TIPS with the Policy Portfolio excluding TIPS? What do they imply about real interest rates and inflation risk?

Answer rating: 100% (QA)

1 Generally speaking an increase in real interest rates has a negative effect on the price of TIPS This is because when real interest rates go up the relative value of TIPS decreases making them less ... View the full answer