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Inflation and Asset Returns

Inflation and Asset Returns. Nominal Return - Real Return - During Inflationary Periods Example. The Fisher Equation. The Fisher Equation: How Does Inflation Affect Interest Rates? Empirical Evidence:. Real vs. Nominal Assets. Real Assets – Nominal Assets –

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Inflation and Asset Returns

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  1. Inflation and Asset Returns • Nominal Return - • Real Return - • During Inflationary Periods • Example

  2. The Fisher Equation • The Fisher Equation: • How Does Inflation Affect Interest Rates? • Empirical Evidence:

  3. Real vs. Nominal Assets • Real Assets – • Nominal Assets – • Expected vs. Unexpected Inflation • Expected vs. Actual Returns

  4. Inflation and Nominal Asset Returns • Assume the 1-year nominal rate (r1) is 11.24%. If Inflation is expected to be 8%, what is the expected real return? • If inflation turns out to be 10% (i.e. higher than expected… • If inflation turns out to be 6% (i.e., lower than expected…

  5. Inflation and Real Asset Returns • Ex. Suppose a firm produces 10 widgets/year at a cost of C per unit where: • Caveats:

  6. Stock Returns and Inflation • Major Findings • Possible Explanations • Empirical Evidence

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