7/ What are HMCs assumptions about the expected real return on TIPS, its volatility, and

its correlation with the real return on the other asset classes? What is the correlation of TIPS with the proposed Policy Portfolio excluding TIPS? What do they imply about real interest rates and inflation risk? HMC assumes both expected return and expected risk of TIPS are the second lowest after cash. The fact that HMC assume the risk and return of TIPS are lower than domestic bond show that they consider TIPS are safer an asset class than domestic bond which agree with the inflation protection feature of TIPS. The correlation of TIPS with other assets class is relatively low with an average correlation of . and the maximum correlation of 0.4 with domestic bond. Given the fact that TIPS and domestic bond price have identical behavior with the move of real interest rate, the correlation of 0.4 is unexpectedly low. The.. show the correlation between the proposed policy portfolio without TIPS with TIPS, which is 0.15. The low corellation of 0.15 show great opportunity of diversifying unsystematic risk of the portfolio. The real return of TIPS is only affected by real interest risk and the low risk of 3% imply that the real interest rate is relatively stable and less volatile. Domestic bond have slightly higher real return which imply the inflation risk premium of the domestic bond