Blue Chip Stock

B is correct. Blue chip stocks are well-suited for Eleanor because they typically provide reliable dividend income (often 2-4% yields) from financially stable companies with long histories of maintaining or increasing dividends. This helps meet her $40,000 annual income need (5% of portfolio). Additionally, blue chip stocks generally exhibit lower volatility than small-cap or growth stocks due to their established market positions, stable earnings, and diversified business models, which aligns with her low risk tolerance and capital preservation goals.

A is incorrect because blue chip stocks do NOT provide guaranteed returns or zero risk. They are still equities that can decline in value during market downturns or company-specific challenges. While they are generally less volatile than other stock categories, they carry market risk. C is incorrect because blue chip stocks do not always outperform bonds. During market downturns, high-quality bonds often outperform stocks, including blue chips. The statement is an absolute claim that ignores market cycles. D is incorrect because blue chip stocks typically do NOT offer the highest dividend yields. Companies in mature or declining industries, REITs, or certain utilities often provide higher yields but may carry different risk profiles. Blue chip yields are moderate but reliable.

B is correct. The defining characteristics of blue chip stocks are qualitative: a long history of stable earnings, strong financial condition (solid balance sheet, manageable debt), and consistent dividend payments over many years and economic cycles. These factors demonstrate the company's resilience, quality management, and commitment to shareholder returns.

A is incorrect because while blue chip stocks are typically large-cap (often exceeding $10B market cap), market size alone does not make a stock blue chip. A company could be large but lack the earnings stability, dividend history, or financial strength required. C is incorrect because S&P 500 inclusion is not the defining criterion for blue chip status. While many blue chip stocks are in the S&P 500, the index includes 500 large-cap companies, not all of which meet the qualitative standards for blue chip designation. D is incorrect because stock price per share is irrelevant to blue chip classification. Stock prices are arbitrary and depend on factors like share splits and capital structure. A company could have a $50 stock price and be blue chip, or a $200 price and not qualify.

B is correct. Blue chip stocks address the client's volatility concerns while maintaining equity exposure because they tend to exhibit lower beta (volatility relative to the market) compared to small-cap or speculative growth stocks. Their stable earnings streams, diversified revenue sources, strong balance sheets, and established competitive positions help cushion them during market volatility. They still provide long-term capital appreciation potential (equity upside) but with less dramatic price swings than more aggressive equity categories, making them suitable for moderate-risk investors.

A is incorrect because blue chip stocks do NOT eliminate market risk. They are still equities subject to systematic market risk. While they may be less volatile than other stocks, they will still decline during bear markets and economic downturns. C is incorrect because blue chip stocks do not move inversely to market downturns (that would describe inverse correlation or hedging instruments). Blue chip stocks still have positive correlation with the overall market, they just tend to decline less severely than small-cap or speculative stocks during downturns. D is incorrect because dividends are never guaranteed. While blue chip companies have strong dividend histories, they can reduce or suspend dividends during severe financial stress. Additionally, dividend income does not directly offset price declines in portfolio value.

C is correct (the EXCEPT answer). Blue chip stocks are NOT immune to market downturns and DO decline during recessions. While they may exhibit more stability and decline less severely than small-cap or speculative stocks, they are still equities subject to market risk, economic cycles, and company-specific challenges. Even the most established blue chip companies like Microsoft, Johnson & Johnson, and Coca-Cola experience significant price declines during bear markets and recessions.

A is accurate: Blue chip status requires a long track record of performance through multiple economic cycles, typically decades of operations. Companies must demonstrate sustained success, not just recent growth. B is accurate: Consistent dividend payments and strong financial condition (low debt, high credit ratings, solid cash flow) are hallmark characteristics of blue chip stocks. This financial strength enables them to maintain dividends even during challenging periods. D is accurate: Blue chip stocks are often recommended for conservative investors because they offer a balance of capital preservation (through financial stability), income (through dividends), and moderate growth potential (through established market positions). They fit risk profiles between bonds (more conservative) and growth stocks (more aggressive).

B is correct. Statements 1, 3, and 4 accurately describe blue chip stocks.

Statement 1 is TRUE: Blue chip stocks are large-cap stocks with market capitalizations typically ranging from tens of billions to over a trillion dollars. Examples include Microsoft ($2+ trillion), Apple ($2+ trillion), Johnson & Johnson ($400+ billion), and Procter & Gamble ($300+ billion). Large size contributes to their stability and market influence.

Statement 2 is FALSE: Blue chip stocks do NOT offer the highest dividend yields. While they provide reliable dividends (typically 2-4% yields), other equity categories offer higher yields. Real estate investment trusts (REITs) often yield 4-8%, utilities may yield 3-5%, and some mature/declining industry companies yield 5%+ to attract investors. Blue chips prioritize dividend sustainability and growth over maximum yield.

Statement 3 is TRUE: This is a defining characteristic of blue chip stocks. They must demonstrate decades of stable earnings through various economic cycles and maintain consistent (often growing) dividend payments. This track record distinguishes them from newer large-cap companies that haven't yet proven long-term resilience.

Statement 4 is TRUE: Blue chip stocks generally exhibit lower volatility (lower beta) than small-cap stocks or speculative growth stocks due to diversified revenue streams, established market positions, strong balance sheets, and institutional ownership. While they still fluctuate with market movements, their price swings are typically less severe.