Canadian Securities Course (CSC) Level 2 Practice Exam

What should be increased during the recovery and expansion phase according to equity and economic cycles?

1. Fixed income exposure

2. Common share exposure

3. Cash holdings

4. Hedge funds

The correct answer is: Common share exposure

During the recovery and expansion phase of equity and economic cycles, increasing exposure to common shares is appropriate due to the typical characteristics of these phases. As the economy begins to recover, companies generally experience improved earnings and growth prospects, leading to higher stock prices. Investors often seek to capitalize on the potential for capital appreciation that comes with equities during these periods, as market sentiment tends to be more positive and investors are more willing to take on risk for higher returns. Common shares can also benefit from increased consumer spending and business investment that usually accompanies economic expansion. Other choices involve strategies that prioritize capital preservation or lower risk. For example, increasing fixed income exposure would generally be more suitable in a contraction phase when investors are more risk-averse. Similarly, holding cash or investing in hedge funds during recovery may not take full advantage of the growth potential presented by the expanding economy. Thus, a strategy focused on common shares aligns with the expectations of increased returns during these favorable economic conditions.