Assignment Question 5.7

[ST6_aspirant]

The question is about the relationship between required and expected returns on conventional government bonds and equity at the start of a recession. The solution says:

"On the other hand the risk-free real rate of return may fall because investors prefer risk-free investments in uncertain times – this will be different in every economic recession and is not a generality!"

Under this scenario, demand for risk-free will go up, reducing the price, and increasing the investment return. How will the real rate of return fall then?

 

[Charlie]

An increase in demand leads to an increase in price and so a decrease in yield ...

 

[ST6_aspirant]

Thanks Charlie, my bad, seems like it was a heavy study day :/