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

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1.
What is the approximate real rate of return on a one-year bond that has a nominal rate of 6 percent while inflation was 2 percent during that year?
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3.92 percent.
2.
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.
3.
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.
4.
What does inflation measure?
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The rate of increase in the general price level of goods and services. With regard to prices, inflation refers to their growth.
5.
Real returns on stocks tend to decrease when inflation increases.
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True. Evidence has shown that inflation causes a decrease in the real return on stock investments.
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