Reading 16 - CFAI EOC, Q's 3&4

On page 503 - 506 in Book 1 of CFAI

Can anyone clarify what should be mimicked using inflation linked bonds, real bonds, or equities? I found the reading pretty straightfoward, but was totally thrown off by questions 3 & 4 at the end. Then couldn’t really find a good explanation in the text or the answer key.


Silva presents Exhibit 1, noting that approximately half of the future wage inflation liability is assumed to correlate closely to CPI and half of the future real wage growth is assumed to correlate closely with domestic equities

this might be the missing piece in the puzzle

Yeah. I guess if you read between the lines, that means that 1/2 of future wage inflation should be real, and 1/2 should be nominal. And 1.2 of real wage growth should be nominal, and 1/2 should be equity.

Then I guess, retired = real since there is an inflation component, and active accrued and deferred = nominal.

Just an overall tricky question…