Equity

CFA Level I Equities
#1

An investor feels that the economy is at its peak; the investor currently holds interest-sensitive stocks, common stocks, and commercial real estate.

Which of the following investment decisions are prudent if the economy slows?

  1. sell common stocks and commercial real estate and buy government bonds and more interest-sensitive stock
  2. sell common stocks and interest-sensitive stocks and buy government bonds
  3. sell common stocks, interest-sensitive stocks, and commercial real estate and buy government bonds

The suggested answer is option 1. However i think that the answer should be option 3 as interest sensitive securities are also on a decline when the economy slows down. Hence, i think selling interest sensitive stocks, common stock and the commercial real estate and buying government bonds would be a prudent option. Can anyone suggest as to why option 1 is correct?

#2

If the economy is slowing an individual will want to invest in lower risk assets with guaranteed income (i.e govt bonds) and sell riskier assets such as common stock and CRE.