Macroeconomic Model - Inflation

CFA Level II Economics
#1

The CFAI text states:

The risk premium for the inflation factor, however, is typically negative. Thus, an asset with a positive sensitivity to the inflation factor (an asset with returns that tend to be positive in response to unexpectedly high inflation) would have a lower required return than if its inflation sensitivity were negative; an asset with positive sensitivity to inflation would be in demand for its inflation-hedging ability.

Little confused here, though.

If: bi1 > 0 and FINFL is greater than expected (actual - expected) > 0

Then should the required return be higher?

#2

Assume you invest in risk-free bond. interest_rate(t)=inflation(t)+real_interest_rate(t) risk_adjusted_interest_rate(t)=interest_rate(t)+interest_rate_risk_premium(t) interest_rate_risk_premium(t)=sensitivity(t)*inflation_factor(t) sensitivity(t)>0 inflation_factor(t)<0 “Inflation-hedging” means that when inflation(t) goes up, interest_rate_risk_premium(t) goes down. Overall risk_adjusted_interest_rate(t) is not changed.