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Question of the Week: Level 3 - Portfolio Management

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

Question of the Week: Level 3 - Portfolio Management 7 votes

A. The correlation between HY and equities will decrease.
0% 0 votes
B. The correlation between IG and HY bonds will increase.
42% 3 votes
C. The correlation between IG bonds and equities will decrease.
57% 4 votes

Comments

  • MarkMeldrumMarkMeldrum OntarioPosts: 73 Associate
    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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