Inflation/deflation effects on asset classes

CFA Level III
#1

V5, P63, Exhibit 18

This is a table that I had to memorize…I found it’s a lot easier to understand it by comparing the effects for each asset class, not comparing across asset classes. Please share your approach if you have a better way to grasp it. For your convenience, I describe what’s in the table.

Exhibit 18: Inflation/deflation effects on asset classes. Rows(3 scenarios): inflation at/below expectation, inflation above expectation, deflation. Columns(4 asset classes): cash, bonds, equity, real estate.

#2

this is how i remember…inflation is good for stock, cash, real estate, deflation good for bonds?

am i close?

#3

Most are correct.

1, Cash and real estate have positive relationship with inflation. 2, Bonds have an inverse relationship with inflation. 3, Equity is an exception. Both higher inflation and deflation hurt equity market.

By the way, it may also help if you switch the first two rows in exhibit 18.

#4

Just to Add:

If inflation is below expectations, its neutral for all except Equity (+ve)

Otherwise the same as you said.

Inflation above expectations: Cash & Real estate (+ve), Equity & Bonds (-ve)

Deflation: Cash, Real estate, Equity (-ve), Bond (+ve)