Inflation affecting risk objective
I was quite caught off guard by Schweser book 2 Exam 1 morning Q5. We are asked to analyse a foundation, nothing out of the ordinary. Question 5B then askes about how inflation affects the foundation’s risk objective.
Obviously, I sticked with what I have learnt meaning that (while return objective is naturally affected by inflation as it is incorporated in calculating required return) there shall be no impact on the risk objective as the risk objective for a foundation solely from the ability to take risk.
The answer however recognises a need for maintaining intergenerational equality (first time I have ever heard of that aspect and I have read Schweser 3 times + x) and therefore maintaining the real value of the portfolio requires taking additional risk.
Has anybody more insights on this argument? To me this argument still raises only a need for a higher required return rate. If this return rate can be achieved then would depend on the fundation’s ability to take risk. But the ability to take risk would not be changed.
What is the difference between the risk objective and risk tolerance? Is there a difference defined in the CFA curriculum?
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