Stock and bond markets should be strongly correlated because: I. both react negatively to interest rate movements. II. both are affected by the risk attitude of investors: when economic uncertainties or investors risk aversion increase, investors require a larger risk premium on assets, and the price of bonds and stocks fall. III. stocks are real assets influenced mostly by real variables, while bonds are nominal assets influenced by monetary variables. The two sets of variables are quite independent. IV. foreign capital flows are influenced by exchange-rate expectations. Foreigners may buy U.S. bonds and stocks when they believe the dollar is strong but sell their U.S. assets in fear of a dollar depreciation. This foreign attitude creates a positive correlation between the domestic bond and stock markets.

a)I and IV only

b)II and III only

c)I, II, and IV only

d)I, II, III, and IV