Question

Please help! Thank you!

Large Stocks Small Stocks Govt Bonds Corporate Bonds Investment High Grade Yield 11.3% 15.3% 7.0% 70% 7.6% Means Full Sample Business Cycles Recessions Expansions 5.6% 12.4% 7.8% 16.8% 12.3% 5.9% 12.6% 6.0% 7.4% 7.7% Consider the economic growth factor. What are good times and bad times? Are stocks high-economic-growth-beta assets or low economic-growth-beta assets? What about govt bonds? Assume that all investors dislike recessions. Which asset (stock vs. govt bond) should have a higher expected return?

Answer 1

Expansion is good times and recession is bad times because during expansion there is more job opportunities and more growth of the economy but during recession there is a contraction in the economy.

Stocks are high economic growth beta assets because stocks perform better due high economic growth and govt bonds are low economic growth beta assets because in case low economic growth it gives more return.

If all investors dislike recessions then stock should have a higher expected return.