People are concerned about maintaining purchasing power in times of rising
inflation. We formulate investment objectives in terms of real wealth,
assuming investors derive utility from the number of goods they can buy with
their monetary wealth. We derive closed-form solutions for the portfolio
choice problem of constant relative risk averse investors, under the
assumption that inflation rates are mean-reverting. We consider alternative
specifications for the inflation compensation offered by the available
assets, in order to study the effect on portfolio choice and welfare.
Moreover, we study the added value of inflation-indexed bonds for the
investor in our real framework
