Leticia is twentyminustwo years old and she has all of her savings in a Certificate of Deposit (CD) at the bank that currently pays an annual 1.5 percent yield. The account is protected by the FDIC so it is virtually risk free. She hopes to use her savings for a down payment on a new house in ten years. Inflation in house prices in her area has averaged 4 percent per year. What financial principle does she need to pay better attention to?

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Business

Sidney Shepherd

13 May, 15:43

Leticia is twentyminustwo years old and she has all of her savings in a Certificate of Deposit (CD) at the bank that currently pays an annual 1.5 percent yield. The account is protected by the FDIC so it is virtually risk free. She hopes to use her savings for a down payment on a new house in ten years. Inflation in house prices in her area has averaged 4 percent per year. What financial principle does she need to pay better attention to?

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Rocketfuel · Answer 1

There is direct relationship between risk and return, and there is time value of money.

Explanation:

Leticia must understand that there is direct relationship between risk and return. The higher the risk of an investment portfolio, the higher the return.

The rate of inflation in house property market price is quite higher than return receivable on her investment in CD.

In order to perfectly hedge against inflation in property price, there is a need for Leticia to invest now in a portfolio that is capable of given her at least 4% return on investment.