EQUITIES GENERALLY DO WELL IN GOOD ECONOMIC TIMES AND BAD IN POOR ECONOMIC TIMES AND THEREFORE HAVE POOR CONSUMPTION HEDGING ABILITY

11. C is correct. Equities generally do well in good economic times and bad in poor economic

times and therefore have poor consumption hedging ability. Hence equity investors require

an equity risk premium which is positive. Hence A is incorrect. Bonds provide a better

hedge against poor economic outcomes. Hence B is incorrect. Section 6.1. LO.i.