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Answer: Corporate bonds tend to be less volatile during periods of high real gross domestic product (GDP) growth than during periods of low real GDP growth.
**B is correct.** When real GDP growth is high, both investment grade and high yield corporate bonds tend to exhibit lower volatility. During economic expansions, corporate default risk decreases, leading to reduced volatility in corporate bond prices. **A is incorrect.** Government bonds tend to generate higher returns during recessionary periods as investors seek safe-haven assets, driving up bond prices and lowering yields. **C is incorrect.** Large capitalization stocks tend to generate lower returns during periods of high inflation than during periods of low inflation. High inflation erodes purchasing power and often leads to tighter monetary policy, which negatively impacts stock valuations. **D is incorrect.** All stocks tend to be less volatile during periods of high consumption growth. Higher consumption typically indicates stronger economic conditions and reduced uncertainty, leading to lower market volatility.
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A group of newly hired analysts at a large pension fund are discussing how changes in different macroeconomic risk factors are likely to impact the fixed-income and equity positions in the fund's portfolios. The analysts consider the effects of some of the most commonly modeled macroeconomic risk factors, including economic growth, inflation, and volatility, on different classes of stocks and bonds. Which of the following observations is correct for the analysts to make?
A
Government bonds tend to generate lower returns during recessionary periods than during expansionary periods.
B
Corporate bonds tend to be less volatile during periods of high real gross domestic product (GDP) growth than during periods of low real GDP growth.
C
Large-capitalization stocks tend to generate higher returns during periods of high inflation than during periods of low inflation.
D
Small-capitalization stocks tend to be more volatile during periods of high consumption growth than during periods of low consumption growth.
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