Which of the following are commonly used to protect portfolios against inflation?

• A. Cash equivalents only
• B. Inflation-linked securities
• C. Growth-oriented assets
• D. Both inflation-linked securities and growth assets

Answer: (D)

When protecting portfolios from inflation, you want assets that either adjust with rising price levels or generate cash flows that can keep up with higher costs. Inflation-linked securities, such as instruments that adjust the principal and interest payments with inflation, provide a direct hedge by ensuring the real value of those payments isn’t eroded. Growth-oriented assets, like equities and other real assets, often have pricing power and cash flows that can rise with inflation, helping their nominal value keep pace with or exceed inflation over time. Cash equivalents, while highly liquid, usually offer fixed nominal yields that don’t rise with inflation, so they seldom shield purchasing power on their own. Combining both inflation-linked securities and growth assets offers a more robust approach to inflation protection, providing both a direct inflation adjustment and potential growth in value.