CFA CFA Level 3 Question of the Week: Level 3 – Portfolio Management (2)

Question of the Week: Level 3 – Portfolio Management (2)

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    • Avatar of MarkMeldrumMarkMeldrum
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        During times of market stress, which is a more likely outcome?

        • A. The correlation between HY and equities will decrease.
        • B. The correlation between IG and HY bonds will increase.
        • C. The correlation between IG bonds and equities will decrease.
      • Avatar of MarkMeldrumMarkMeldrum
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          The correct answer is Option C.

          During periods of market stress, investors may exhibit a “flight to quality” by buying safer assets such as government bonds (increasing their prices) and selling riskier assets such as equity securities and high-yield bonds (lowering their prices). These actions may decrease the correlation between government bonds and equity securities, as well as between government bonds and high-yield bonds. At the same time, the correlation between riskier assets such as equity securities and high-yield bonds may increase.

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