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I’m reading the first edition of Paul Samuelson’s Economics (1948). In Chapter 6, “Business Organization and Income,” after describing bonds, preferred stocks, and common stocks, he writes:

To test his understanding of these three forms of securities, the reader should make sure that he understands why common stocks are better investments in time of inflation than the other two. (p. 124)

I can’t get a grip on the question, in some part because I don’t know what it means and in another part because I don’t know what background assumptions we are supposed to make. Does it mean: if one wants to buy a security from a profitable company during inflation, which should one buy?

Even then I’m not sure how to proceed merely on the assumption that the economy is seeing some generic increase in prices. I’m looking for some help interpreting the logic Samuelson is trying to get at.

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You probably want to isolate the effect of inflation. So consider a bond, a common stock and a preferred stock that have the same price today but there is inflation. That is, you expect prices to increase.

Given this scenario, which of these three assets should you invest on?

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