Which type of investment typically provides a hedge against inflation risk?

The correct answer is TIPS, which stands for Treasury Inflation-Protected Securities. TIPS are specifically designed to provide protection against inflation risk. The principal value of TIPS increases with inflation, as measured by the Consumer Price Index (CPI), and decreases with deflation. This means that as inflation rises, the amount you receive at maturity also increases, helping to maintain purchasing power. Additionally, TIPS pay interest twice a year, and the interest payment is applied to the adjusted principal, which means that the interest payments themselves can also rise if inflation increases.

The other options do not offer the same level of protection against inflation. A 10-year Treasury note has a fixed interest rate and does not adjust according to changes in inflation. Hence, while it is considered a safer investment, it does not safeguard against rising prices. A variable annuity may provide some flexibility in terms of investment choices but generally does not specifically guard against inflation. Finally, a corporate bond typically offers a fixed payment that does not adjust for inflation, making it vulnerable to inflation's eroding effect on purchasing power. Thus, TIPS stand out as the investment type that provides a reliable hedge against inflation risk.