hard · SAT Reading & Writing

Economists analyzing high-yield debt markets have found that while these 'junk bonds' offer significantly higher interest rates than investment-grade bonds, they also exhibit a much higher correlation with equity market fluctuations. During periods of economic contraction, the default risk of high-yield issuers tends to rise in tandem with falling stock prices. Therefore, an investor seeking to diversify a portfolio primarily composed of equities by adding high-yield bonds

1. May find the bonds fail to provide the intended risk mitigation during market downturns.
2. Should expect the bonds to outperform equity indices whenever stock prices are declining.
3. Must prioritize interest rate payments over the long-term capital appreciation of the bonds.
4. Will eliminate all systematic risk within their investment portfolio through this strategy.

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