Inflation Risk (Purchasing Power Risk)
The risk that returns fail to keep pace with rising prices.
What is Inflation Risk (Purchasing Power Risk)?
The quiet risk in 'safe' assets. A nominally positive return can be a real loss. It is the primary argument against an all-cash or all-bond allocation over a multi-decade horizon.
Inflation Risk (Purchasing Power Risk): a worked example
3% in a CD against 4% inflation is a 1% real loss each year.
More terms in Risk & Return
Systematic Risk (Market Risk)
Risk affecting the whole market that diversification cannot remove.
Unsystematic Risk (Specific Risk)
Company- or industry-specific risk that diversification can eliminate.
Beta
How much a security moves relative to the overall market.
Alpha
Return above what the portfolio's risk exposure would predict.
Standard Deviation
How widely returns disperse around their average.
Sharpe Ratio
Excess return per unit of total volatility.
Correlation
How closely two assets move together, from -1 to +1.
Diversification
Spreading capital across assets so no single failure is fatal.