Chartered Alternative Investment Analyst Association (CAIA) Practice Exam

How is Robert Hampton, a real estate speculator, likely to benefit from inflation?

1. Invests in properties that have long-term, fixed leases.

2. Can obtain long-term, fixed-rate loans.

3. Can obtain variable-rate loans tied to short-term rates.

4. Invests primarily in commercial real estate, rather than residential properties.

The correct answer is: Can obtain long-term, fixed-rate loans.

Robert Hampton, as a real estate speculator, would likely benefit from inflation through the ability to obtain long-term, fixed-rate loans. In an inflationary environment, borrowing costs can be particularly advantageous when interest rates are low relative to the rate of inflation. Long-term, fixed-rate loans lock in a lower cost of borrowing for the duration of the loan, allowing Hampton to repay the loan with currency that is worth less over time due to inflation. As inflation rises, the real estate he invests in may appreciate in value, and rental income could also increase, providing him with higher returns while his repayment obligations remain fixed. This difference between the appreciating asset value and the fixed repayment amount creates a powerful leverage effect, enhancing the overall profit from his investment. In contrast, options involving fixed leases or variable-rate loans may not yield the same level of benefit. Fixed leases could restrict the ability to raise rents in line with inflation, while variable-rate loans could lead to increased costs if interest rates rise in an inflationary environment. Therefore, obtaining long-term, fixed-rate loans represents the most strategic advantage for a real estate speculator during inflationary periods.