Answer-first summary for fast verification
Answer: Currency strategies such as currency carry trades tend to perform poorly during periods of high volatility.
## Explanation **A is correct.** Currency strategies, particularly currency carry trades, tend to perform poorly during periods of high volatility. This is because: - Carry trades involve borrowing in low-interest-rate currencies and investing in high-interest-rate currencies - During high volatility periods, risk aversion increases, leading to unwinding of carry positions - Currency markets become more unpredictable, reducing the effectiveness of carry strategies **B is incorrect** because risk-free bonds actually tend to perform well during periods of high volatility as investors seek safe-haven assets. **C is incorrect** because the relationship between stock returns and volatility is generally negative and doesn't change sign based on business cycle phases. Higher volatility typically corresponds with lower stock returns. **D is incorrect** because both stock and bond returns tend to decrease during periods of rising volatility, though bonds may be less affected or even benefit from flight-to-quality effects. This analysis aligns with empirical evidence showing that currency carry strategies are particularly vulnerable to volatility spikes, making them poor performers during turbulent market conditions.
Author: LeetQuiz .
Ultimate access to all questions.
A risk analyst at a bank is asked to prepare a report that tracks the relationship between volatility and asset performance. The analyst assesses the performance of various asset classes using empirical evidence over the last three decades and compares returns on those asset classes with changes in market volatility. Which of the following would be a correct statement for the analyst to include in the report?
A
Currency strategies such as currency carry trades tend to perform poorly during periods of high volatility.
B
When volatility is rising, all assets are either positively or negatively affected, with the exception of risk-free bonds.
C
Whether the relationship between stock returns and volatility is positive or negative depends on the phase of the business cycle.
D
When volatility is rising, stock returns tend to increase but bond returns tend to decrease.
No comments yet.