1. What are the factors that determine the stock/bond correlation based on the simple model proposed in the article? Please explain the effects of each factor on stock return, bond return, and the correlation between them

2. Does the evidence from real data support the prediction of the proposed model?

What Drives the Stock/Bond Correlation?4 Exhibit 3 illustrates the above contemporaneous relationships using the Exhibit 3: Sharpe Ratio in Macroeconomic Environments Minus Long-Term Sharpe Ratio January 1, 1972 - December 31, 2021 Soempiricallywefindthatstocksandbondshaveoppositesensitivitiestoeconomicgrowth,butdirectionallysimilarsensitivitiestoinflation.Inotherwords,growthshocksdrivestockandbondreturnsinoppositedirections,whileinflationshocksdrivetheminthesamedirection.Therelativeimportanceofgrowthandinflationnews,therefore,suggestsitselfaspotentialdriveroftheSBC.Inthenextsectionwesetoutthishypothesismoreformallyandthentestitonnearlyacenturyofdataacrossseveralmarkets. A Simple Model to Understand the SBC In the previous section we showed empirical to create a simple model linking returns to evidence confirming the intuition that stocks inflation and growth news, assuming that andbondshaveoppositesensitivitiestoeconomicgrowth,andsimilarsensitivitiestodrivenbygrowthshocks(e)andinflationstockreturns(r)andbondreturns(r)are inflation. Now we use this relationship shocks (e2)7 r4=bhkee+bs.nee (1) rb=bbees+btsaee (2) bi,s,bta