Question
Equities are reflective of a higher rate of return and higher risk. In contrast, Government Bonds are generally reflective of a risk-free rate of return.
Equities are reflective of a higher rate of return and higher risk. In contrast, Government Bonds are generally reflective of a risk-free rate of return. So, when the times are better than equity, it will be provided with a higher return rate because the company's growth and profits will be increasing, so it will be formulated into higher shareholder value. It will lead to higher equity-growth. Therefore, people will be more investing in the equity of the times of high growth, and they will be avoiding risk-free rate of return because that will be offered at a lower rate so that they will be choosing the equity over Government Bonds.
According to (Lee et al., 2019) evidence, future financial market uncertainty hurts the co-movement between the two markets. It suggests that the flight to safe-haven phenomenon remains valid for the interdependence of Chinese stock and government bond markets. When the economic cycle would be in a downward cycle, there will be an expectation of a high economic downturn and an impending recession. Government Bonds will be favoured because equities will provide a negative rate of return mostly as they will be factored into a lower growth rate. Also, slower growth of the economy, whereas the risk-free rate will be a better alternative due to higher security and capital protection and the uniform rate of return, acting as a natural pair.
One can lower the portfolio's overall risk by the inclusion of the treasury bonds, and they will be trying to eliminate the stake through the inclusion of other investment-grade bonds while keeping them self-diversified in the equity portfolio. For example, holding the United State treasuries and stocks of Tesla and Apple will be providing better diversification because treasury bonds are assumed to be risk-free in nature.
In this article, you only consider Government bonds as safe. What u suggest about the risk of private or corporate bonds with AAA rating? Can they be used to diminish the portfolio's risk? Please answer it in not more than 50 words.
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