Question of the Week

Several years ago an investor made a one-time investment of $10,000 into a mutual fund.  Currently, the NAV of the fund stands at $15,000.  During this same period of time, the CPI went from 100 to 110.  In terms of constant dollars, which of the following is true of the value of his investment?

A) The purchasing power of the investment is greater than $15,000.
B) The purchasing power of the investment is greater than $10,000 but less than $15,000.
C) The purchasing power of the investment has remained at $10,000.
D) The purchasing power of the investment is now less than $10,000.

Answer:

The correct answer is B).

The CPI is a measure of inflation, the losses or gains in the purchasing power of the dollar.  The CPI has risen, cutting into the purchasing power of the investment, but it hasn’t risen, proportionally, as much as the value of the investment.