Traditional Asset Classes, Inflation and Returns in Real Terms Problem Set
1. What would the purchasing power of $1 million dollars received at the beginning of 1970 be worth at the end of 2012?
● The question is for $1 million dollars as if it had not been invested in any security.
● The question is simply about inflation and the purchasing power of the $1 million at the end of 2012.
● Please note that an increase in inflation decreases your purchasing power.
2. Plot the growth (as a plot line graph in a NEW tab in the provided Excel file) in your investment, assuming you invested $1,000 in 1900, in each of three possible assets (stocks, treasury bonds, or treasury bills) over the entire time period. Compute the annualized returns, annualized standard deviations, and correlations across these investments.
● Which had the best returns, which had the most volatility?
● Which are the best (and worst) performing investments? Why?
● Which would you recommend to your MBA degree colleague, why?
3. Which investment (stocks, treasury bonds, or treasury bills) is most correlated with inflation? Why? What are the historical correlations across the entire sample? Are the correlations stable?
4. Re-do Question 2 and Question 3 in “real value” (as opposed to Nominal Value) terms. Comment on the similarities and differences.