- CFA Exams
- CFA Exam: Level II 2021
- Study Session 17. Portfolio Management (2)
- Reading 46. Economics and Investment Markets
- Subject 3. The Yield Curve and the Business Cycle

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**CFA Practice Question**

Which statement about the break-even inflation rate is true?

B. Break-even inflation rates are simply the markets' best guess of future inflation over the relevant investment horizon.

C. The 10-year break-even inflation rate is the sum of θ

A. The 3-month break-even inflation rate is very close to the 3-month expected inflation rate.

B. Break-even inflation rates are simply the markets' best guess of future inflation over the relevant investment horizon.

C. The 10-year break-even inflation rate is the sum of θ

_{t,10}and π_{t,10}, where θ_{t,10}is the expected 10-year inflation and π_{t,10}is the risk premium for the uncertainty of the expected 10-year inflation.Correct Answer: A

A is true. The inflation premium is negligible for short-term default-free securities.

B is false. Break-even inflation rates are not simply the markets' best estimate of future inflation over the relevant investment horizon. They also include a risk premium to compensate investors for their uncertainty about future inflation.

C is false. The 10-year break-even inflation rate incorporates both θ

_{t,10}and π_{t,10}but is not simply the sum of the two.###
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