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FRM Part II · FRM Exam Part II · Factor Theory

An analyst studies how bond and equity returns respond to macroeconomic factors. Which statement best describes the typical behavior of nominal government bonds and equities across macroeconomic regimes?

Nominal government bonds tend to do well in low-growth, low-inflation settings because yields fall, while equities do poorly when growth is weak. Unexpected inflation hurts nominal bonds, and neither asset is a reliable inflation hedge.

  1. ANominal government bonds perform well when inflation surprises are high and growth is strong
  2. BEquities perform best in low-growth, high-inflation environments
  3. CNominal government bonds tend to perform well in low-growth, low-inflation environments, while equities perform poorly in low-growth environmentsCorrect
  4. DEquities and nominal bonds are both hedges against unexpected inflation

Explanation

Nominal bonds gain from falling growth and inflation because yields drop, while equities suffer when growth is weak. Unexpected inflation hurts nominal bonds, so the other statements are wrong.

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