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CFA Level I · CFA Level I Exam · Real Estate and Infrastructure

Which of the following is the most likely reason that infrastructure investments are often used as a partial hedge against inflation?

Infrastructure is often a partial inflation hedge because regulated tariffs or contracted revenues, such as tolls and availability payments, are frequently linked to inflation indexes. This allows cash flows to rise with price levels. Heavy equity financing or equity-market correlation does not explain the hedge.

  1. ARegulated or contracted revenues are often linked to inflation indexesCorrect
  2. BInfrastructure assets are usually financed entirely with equity
  3. CInfrastructure cash flows are highly correlated with equity markets

Explanation

Many infrastructure assets have concession agreements or regulated tariffs that adjust with inflation, so revenues rise with price levels. Infrastructure is typically financed with significant debt, not all equity. High correlation with equity markets would not provide an inflation hedge.

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