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

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1.
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.
2.
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.
3.
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.
4.
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.
5.
One measure of inflation in the United States is the Consumer Price Index.
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True. The Consumer Price Index measures inflation.
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