Equity Vs. Bonds

When compared to investors living in a country with high inflation, investors living in a country with generous stat pensions will have allocations to equities (higher/lower) and fixed income investments (higer/lower)? Thx!

I would say low equities and high bonds. If the state is providing the pension then no need to take on the extra risk of equities in retirement planning.

funny, I was thinking high equities, low bonds! if the state is paying a pension, no need to rely on the income from fixed income investments, so invest in equities

i remember either cfai or schweser using the example of germany having high pensions, so they have low equity allocations

yeah i remeber this one as well, dspapo is right the pension causes them to lower their investment in equities…

Also, you don’t really want bonds in a high inflation environment.

you need to have bonds in high inflation environment as the pensions that you will be getting … their purchasing power will erode with inflation, therefore to cover up for the inflationary erosion of the purchasing power, there needs to be a bond that makes interest payments atleast equal to the inflation rate

dspapo Wrote: ------------------------------------------------------- > i remember either cfai or schweser using the > example of germany having high pensions, so they > have low equity allocations I do not think there is a clear relationship between the two issues. With regard to inflation, one could say: high inflation -> invest in securities that are (at least a bit) inflation protected (so more equities, less bonds) But guaranteed income could be taken as an argument for MORE allocation to equities, since a pension is essentially a fixed income asset (so you’re effective equity allocation is smaller if you also take into account the pension part) In which part of the books is this? (I guess portfolio mgmt?) cheers

Again, not really the best question. As pointed out, there is now the ability to take the higher allocation to equities, but because your needs are basically already filled by having a generous pension, you don’t NEED to devote more to equities. I remember the chart in the book though, and think that they would be expecting the answer to be low equities/high bonds. I don’t necessarily agree with that answer, however. If you have a generous pension, you really won’t need to dip into your portfolio as much, thus you would be more likely to set up an estate/other way of gifting your $$ to your kids and/or grandkids, in which case you would devote more to equities. Would doubt that this subjective of a question would be asked on the CFAI exam 1…seems more of an exam 3 question regarding portfolio management.

Gee, they are doing this kind of stuff at L1 now? Equities are a good hedge against inflation (but if inflation becomes hyperinflation, equities start to fail, but so do bonds other than TIPS). So if you have higher (moderate) inflation, you want more equities and fewer bonds. Note that if inflation is high AND STABLE, then bonds are ok, because the bond yield rise will reflect inflation expectations. It’s really unexpected increases in inflation that do bad things for bond yields. – Now for the question. Country A has higher inflation: therefore more equities and less bonds than country B Country B has generous state pensions: I don’t know this… if the pensions are generous, maybe I have a higher risk tolerance and can do more equities after all. This does sound more like a Level 3 question (and one that you can justify in a text answer) Is there an answer/explanation offered?

If I have a state pension, the govt has essentially given me a perpetuity (but there is legislative risk). The last thing I need is more bonds. I would invest in just about anything else.