inflation the need to take risk

[Gmax]

As per Schweser notes, in the foundation higher than the general level of inflation increase the need to take risk. What the need means? Is it ability or willingness? I thought that for an institution only ability to take risk is pertinant. Does it mean that increase in inflation increase ability to take risk?

 

[MrSmart]

I don’t get what you’re trying to say.
I can tell you however, that it’s not ability, whatever you’re looking for.

 

[Gmax]

MrSmart wrote:
I don’t get what you’re trying to say.
I can tell you however, that it’s not ability, whatever you’re looking for.

Sorry for not being clear. My question is how the inflation affects risk return objective ?

 

[Gersonides]

Inflation is included in te return objective. If inflation is higher, there is a need for a higher overall return to keep up with the higher inflation. In order to generate a higher return, you must generally take on more risk.

 

[MrSmart]

If you’re liabilities are indexed (or grows) with inflation, then you have to account for it in your return objective based on some long term expected inflation rate.
Then there is unexpected inflation that could ruin your risk tolerance, but we don’t know that for sure. I don’t think interest rate risk or inflation risk is addressed in the IPS.