Risk-free real asset

The presence of a risk-free real asset is of great value to the study of finance, lending itself to theoretical and behavioural analysis. In this section, we examine the relationship between inflation-linked bonds and nominal bonds, then show how this framework can be applied to the relationship with equities. 

We have compared linkers with other investment assets already, and that is really at the root of the issue. It is a question of opportunity cost. Risk-free real yields are determined by the prospective returns that other, riskier, assets in an economy are perceived to offer. 

Efficient frontiers also invariably place Treasury bills as the risk-free asset. T-bills may be risk-free from a creditworthiness point of view, bnt it is not tenable that a three-month nominal asset is a risk-free instrn-ment for someone with, say, a 30-year savings horizon. If you are investing for 30 years, over which time you are interested in your prospective real returns, then a 30-year linker (to be held to maturity) is your riskfree asset, almost by definition. 100% invested in that bond becomes the lowest risk portfolio on yonr frontier. Efficient frontier analysis starts to lose its impact once this premise is accepted, not least because you do not have a large data sample of consecutive, nonoverlapping 30-year periods (for any asset) to produce robust analysis. ... 

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