Optimal investment and consumption strategies in stochastic investment environment subject to inflation risk

Optimal investment and consumption strategies of a financial market agent benefiting from intermediate consumption and/or terminal wealth are investigated. An explicit analytical characterization of the optimal portfolio (speculative demand for risky assets and a hedge portfolio) is derived in terms of risk premiums, stochastically evolving investment opportunities and investor's utility function. The results demonstrate clearly what risks are to be optimally hedged and show how to finance a desired real consumption process by investing in nominal securities market.