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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.
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.
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.
Historically, stocks have provided a rate of return superior to the rate of inflation in the United States.
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True. Stock returns have historically outpaced inflation in the United States; this is one reason for their popularity.
5.
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.
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