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.

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.

A CFA Level 3 Discussion About Question Of The Week: Level 3

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- MarkMeldrum
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  10 Apr 2020 at 6:51 am
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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.
- MarkMeldrum
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  13 Apr 2020 at 6:22 pm
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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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