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

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.