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How to understand the returns on cash?

Discussion in 'CP1' started by Smith, Jan 21, 2020.

  1. Smith

    Smith Very Active Member

    In Chapter 13 - relationships between returns on asset classes, page 8, paragraph 2.5, how to understand that "Returns on cash might be expected to exceed inflation except in periods where inflation is rising rapidly and is under-estimated by investors." What the cash refer to here?
     
    Smith, Jan 21, 2020
    #1
  2. Lindsay Smitherman

    Lindsay Smitherman ActEd Tutor Staff Member

    Hi - this is basically referring to cash in deposit accounts, with a bank or building society say.

    It is based on the idea that investors would (ideally) not place their cash into an account unless the interest rate earned on it exceeds the rate of inflation - otherwise the real value of the cash deposit would be eroded. The theories which underlie the relationships between required and expected returns that are set out in this chapter are based on some assumptions, one of which is stated as being that investors 'will required that the value of their investments do not decrease in real terms'.

    As the notes go on to say after the line that you have quoted, this doesn't always prove to be the case for cash on deposit - and indeed the recent / current UK savings market is a good example of that!
     
    Lindsay Smitherman, Jan 21, 2020
    #2

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