What is purchasing power risk associated with?

Purchasing power risk is fundamentally tied to the potential for inflation to erode the value of money over time. This risk arises when the rate of inflation exceeds the rate of return on investments, thereby diminishing the real value of money. For example, if inflation is at a rate of 3% annually, but an investment is only yielding a 2% return, the purchasing power of the money invested decreases by 1% each year.

This concept is crucial for investors as it highlights the importance of selecting investments that can at least keep pace with inflation. Failing to account for purchasing power risk could result in significant financial loss over time, particularly for those relying on fixed-income investments, which do not adjust for inflation.

The other options presented do not accurately reflect purchasing power risk. The risk of losing all invested capital relates to investment volatility, while the possibility of interest rates having no impact does not directly connect to purchasing power erosion. Finally, increased market demand is more relevant to market dynamics than to the risk of a decrease in purchasing power due to inflation. Thus, the association of purchasing power risk with inflation is the most direct and pertinent factor.