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