Reading 47 - CFAI EOC question #11

The question asks what the benefit of taking a short position in Fund B is relative to an equally sized long position in Fund C. Fund B has an inflation factor sensitivity of 1.1, while Fund C has an inflation factor sensitivity of 1.0. The answer indicates that a short position in Fund B would reduce exposure inflation risk. Can someone explain why this is the case?

I am trying to work through the answer, but the only logical conclusion I can come to is that an inflation “shock” in the context of a macroeconomic model would detract from the fund’s return? Thus, being short the fund with the larger sensitivity of the inflation “shock” is a benefit.

Can someone please help clarify? Thanks!

It’s like hedging against inflation. A lower than expected inflation outcome (F_inf < 0), adds positive returns.

That would be a benefit of shorting B, versus a long position in C.

Hope it helps