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Old 11-22-2017, 04:44 PM
tsh3c tsh3c is offline
 
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Default EOM 3 Task 4 - constant real rate of return?

I am working on Task 4 of EOM3 where you test the effect of varying inflation on the pension while keeping the real rate of return constant.

When I initially read the task, I skipped over "real" and just varied the inflation rate while keeping the fund return constant. This seems like the easiest way to sensitivity test the model parameters, but is not doing what is asked for.

Now that I read it again, I am thinking of using the equation 1 + i = (1 + r)(1 + pi) where i is the fund return, r is the real rate of return, and pi is the inflation rate. When the inflation rate is changed, the fund return also needs to change in order too keep the real rate of return constant. What do you all think? Did you use this approach for task 4?
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Old 11-22-2017, 04:59 PM
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ao fan ao fan is offline
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I just kept the fund rate constant and varied the inflation rate. Didn't get results yet though, so I could have failed with that approach.

I did read a lot of old threads on this though and pretty sure most people did it the simple way I did. The "real" part of it does make it sound like it should be done the way you're saying.
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Old 11-22-2017, 05:09 PM
tsh3c tsh3c is offline
 
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Thanks, ao fan! That does seem like a sensible approach. I read through the old posts as well and saw that others kept the fund return constant.

The only reasons why I am considering the constant "real" rate of return is because it is specified in the instructions. Also, another poster had a good point that equity/bond yields tend to vary with inflation in real life.
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