Pg 503, Book2

Exhibit 1 - Should the last row “Future Real Wage Growth” be mimicked using Real Bonds + Equities or Nominal Bonds + Equities?

Future Real Wage Growth = 50% Domestic Equities + 50% Real Bonds.

^ That’s exactly what I also though, but somehow they have assumed the Liability mimicking portfolio is = 50% Equities and 50% Nominal Bonds!

For Future real wage growth combination of nominal bonds and equities is used as benchmark.

I guess because the equities keep up with inflation?

Yeps, makes sense. Thanks

Real wage growth => Economic growth => Equities

future wage growth: equity+nominal

future wage inflation: real+nominal

Same Ques Part 6 Pg 505

Why A and not C?

how do we know the returns from asset only approach will be greater the return from the return-generating portfolio?

Or we rejected C, because it mentions usage of derivatives for only extreme market movements?

read P No 499