Qualified Financial Adviser (QFA) Investments Exam 2 Practice Test

Which risk is associated with inflation eroding purchasing power?

Market Risk Currency Risk Interest Rate Risk Inflation Risk

Correct Answer:

Inflation Risk

Explanation:

Inflation eroding purchasing power is about the real value of money and returns declining as prices rise. The risk here is inflation risk—the danger that rising prices outpace your investment returns, causing the purchasing power of your money to shrink over time. Market risk involves overall price swings in markets, currency risk is about changes in exchange rates, and interest rate risk is about how fluctuating rates affect asset values, especially bonds. Inflation risk is the specific concern when the concern is losing real buying power because prices increase faster than your returns. For example, if prices rise 3% in a year but your investment earns only 2%, your real purchasing power falls even though you earned a positive nominal return.

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