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Basics (Saving and Investing) Intermediate: Effects of Inflation on Investments

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1.
High inflation results in lower nominal returns for fixed-income investors.
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False. Nominal returns are not affected by inflation. However, high inflation will result in lower real returns for fixed-income investors.
2.
An annuity or bond whose interest rate is linked to the Consumer Price Index is considered a perfect hedge against inflation.
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True. Interest rates that are linked to the Consumer Price Index will increase at a proportional rate to inflation, making index-linked investments a perfect hedge.
3.
Inflation occurs when the general price level falls from one period to the next.
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False. Inflation occurs when the general price level rises from one period to the next.
4.
Evidence has shown that inflation and stocks have which relationship?
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Real returns on stocks tend to decrease when inflation increases. Remember that real returns are adjusted for inflation.
5.
Hedging is the practice of reducing risk by investing in risk-free assets.
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False. Hedging is the practice of investing in assets that reduce the risk associated with other assets in your portfolio by responding to a particular stimulus in an opposite manner.
Introduction to Effects of Inflation on Investments What Is Inflation? The Effect of Inflation on Fixed-Income Investments The Effect of Inflation on Stocks Hedging against Inflation Summary of Effects of Inflation on Investments Find out what you learned