pennyless

1. Equity will be a good hedge against inflation for as long as the company is able to pass cost inflation along to customers.

2. Why would you want to hold cash (plain vanilla cash) when you can invest it at the risk free rate? By using the second formula, you end up with plain old cash but the first formula converts the cash into a risk free rate investment. That is why when you need to change equity exposure to cash over a certain period of time you use the first formula that converts to cash at risk free rate but to change exposure to another asset class you use the first formula since you need to get plain cash before re-investing.