In this unit we learned to illustrate how diversification can reduce risk without affecting expected returns, illustrate how the optimal risky portfolio constructed using the Index Model can differ from that constructed with the Markowitz Model, and analyze the CAPM model and the assumptions on which it is based. Lets extend the discussion by examining the practical implications of these concepts.
It is widely believed that changes in certain macroeconomic variables may directly affect performance of an equity portfolio. As the chief investment officer of a hedge fund employing a global macro-oriented investment strategy, you often consider how various macroeconomic events might impact your security selection decisions and portfolio performance.
Briefly explain how inflation would affect portfolio risk and return.