Final answer:
During a recession, an appropriate asset allocation strategy would involve selling defensive stocks and buying long-term bonds.
Step-by-step explanation:
If you believe the economy is about to go into a recession, you might change your asset allocation by selling defensive stocks and buying long-term bonds.
In a recession, investors tend to seek safer investments like bonds, while selling off riskier assets like stocks. Defensive stocks, which are less affected by economic downturns, may still be sold to further reduce risk. Long-term bonds, on the other hand, are considered more stable and tend to perform well during economic downturns.
In anticipation of a recession, it is a common strategy to sell growth stocks and buy long-term bonds, providing greater stability and potentially benefiting from lower interest rates.
If you believe the economy is about to go into a recession, you might change your asset allocation by selling growth stocks and buying long-term bonds. The correct answer to the question is A: growth stocks; long-term bonds. During a recession, growth stocks are likely to suffer as corporate earnings and investor confidence decline. In contrast, long-term bonds tend to be less volatile and offer more stability during economic downturns, as they can provide fixed income despite market fluctuations. Moreover, the value of long-term bonds often increases when the central banks lower interest rates to stimulate the economy, making them a safer investment during recessions.