Advanced Diploma of Financial Planning (ADFP) Practice Test

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Which of the following statements about cyclical stocks is true?

  1. Cyclical stocks thrive in expanding economies

  2. Cyclical stocks are stable investments regardless of economic cycles

  3. Cyclical stocks usually perform poorly during recessions

  4. Cyclical stocks offer guaranteed returns

The correct answer is: Cyclical stocks thrive in expanding economies

Cyclical stocks are indeed known for their performance being closely tied to the economic cycle. When the economy is expanding, consumer spending tends to increase, leading to higher revenues for companies in sectors such as automotive, travel, and luxury goods. As a result, cyclical stocks often experience significant gains during periods of economic growth. This responsiveness to economic conditions is what distinguishes cyclical stocks from more stable investments, which typically do not show large fluctuations based on the economic climate. The performance of cyclical stocks tends to decline during economic downturns, highlighting their dependence on economic expansion. Hence, the option indicating that cyclical stocks thrive in expanding economies accurately reflects their characteristics and behaviors in relation to economic cycles.

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