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CFA iii > CAP Market Expects > Flashcards

CAP Market Expects Flashcards

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CFA flashcards
1
Q

7 Steps in creating a capital market expectation

A
  1. Determine asset and time horizon of forecast
  2. Research history
  3. Specify methods of determining expectations
  4. Find sources of data
  5. Intepret current market conditions
  6. Provide Expectations
    Monitor
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2
Q

Name 9 challenges in forecasting capital market expectations

A

Limitations on economic data

Errors and biases

Historic estimates (covariance stationary)

Expost data is bias

Analyst methods

Conditional information

Misintepreting correlations

Psycological biases

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3
Q

Name and explain the 6 psycological biases to capital market expectations

A
  1. Achoring - high inportance on first thing heard
  2. Status quo - thinking things will remain the same
  3. Confirmation bias
  4. overconfidence bias - thinking youre hectic
  5. Prudence bias - not acting because scared
  6. Avalaiblity bias - being heavily influenced by recent big events
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4
Q

What are the limitations to economic data

A

is historic
Data is revised
definitions and calculations change on published data

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5
Q

What sort of errors in data can be seen?

A

Transcript (muffings)
Survivorship bias
Smoothed data

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6
Q

Historic estimates - why bad in capital market expectations

A

Historic data does not always have the same underlying regime when looked at over multiple periods - so like gold v usd over 200 years would not be useful

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7
Q

Analyst methods that effect capital market expectations

A

Data mining - bad

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8
Q

Correlation does not equal caustation

A

free answer

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9
Q

You are at the bottom of the business cycle, in a trough, what does that mean for the yield curve and why

A

The yield curve going to start to steepen - why? Loose monetary and fiscal policy Steepening yield curve

Yc points direction of economy movement

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10
Q

Top of the peak of the business cycle, what does this mean for monetray and fiscal policy AND the yield curve

A

Restrictive monetary and fiscal policy which means a inverted yield curve

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11
Q

What is an exogenus shock, and what 5 things may cause it

A 
Natural disaster
financial disaster
War (policitcal event)
Government policy
Tech advancements
Discovery of natural resources
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12
Q

3 ways to forecast economic policy?

A

Econometrics
Economic indicators
checklist approach

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13
Q

Deflation, what does it mean for bond, stock and real estate

A

Bond up - IR down = higher bond price
Stock down = less value = down
Real estate down = increased deafult rates

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14
Q

Why is it hard to stimulate a deflationary market

A

IR are so close to 0 that no monetary policy will work

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15
Q

Taylor rule = what is it

A

Taylor rule = Nominal rate +.5( expected GDP - Target GDP) + .5(Expected inflation-target inflation)

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16
Q

If the taylor rule outcome is LOWER than the policy rate of a central bank - what should they do

A

Lower = loosen`

17
Q

What are the 3 formal tools for forecasting risk premias

A

Statistical tools
DCF
Risk build ups

18
Q

What are the 3 statistical tools for forecasting capital market expectations

A

Sample statistics
Shrinkage estimations
Time series

19
Q

Using the risk premia build up approach, what are the 4 components to predicting fixed income discount rates

A

Nominal rate
Maturity premium
Liquidity premium
Credit premium

Add them up and that is your discount rate

20
Q

Imagine you use the risk premia build up approach to forecast fixed income discount rate/ytm.

Lets image your estimate comes to 5%, but the market is pricing it a 4% - buy the security or not?

A

DO NOT BUY IT. You should be compensated at 5% for that level of risk, so do not buy it

21
Q

Grinold Kroner Model - show formula

A

Dividend Yield + Exepcted Inflation + Expected Earnings growth - (change in outstanding shares) + change in PE ratio

22
Q

In the Grinold kroner model, what is the INCOME return?

A

The divident yield and the change in outstanding shares (EXPECTED)

23
Q

In the Grinold kroner model, what is the Earning return?I

A

EXPECTED The earnings + inflation

24
Q

In the Grinold kroner model, what is the Price return?

A

Change in PE

25
Q

THe Singer Taheer Model - what is the formula (2 formulas)

A

(Correlation * SD )+(Sharpe Ratio) -> Integrated markets

(1 * SD )+(Sharpe Ratio) -> Segmented markets

This is the RISK premium of each type of market

26
Q

How would increasing interest rates or vacancies effect the cap rate on real estate valuation

A

it would DECREASE it - becaise the G function in (r-g) would increase

27
Q

Real estate risk premiums

A

Term (maturity)
Liquidity
Credit
Equity risk

28
Q

How should you adjust for smoothing of indicies when valuing or forecasting real estate risk. return

A

Jack it up. Smoothing indicies will INCREASE return and REDUCE risk, so increase the risk factor and reduce return factor

29
Q

How are reits correlated with equity index

A

Positivley over the short term

30
Q

What are the 3 themes/theories to predict forex movements for capital market expectations

A

Trade flows
PPP
Portfolio Approach

31
Q

What is the trade approach to forex predictions in capital market expectatison

A

Deficits (if unsustainable) will depreciate a currency

32
Q

PPP - what is it and how does it effect FOREX

A

it is the effect of inflation on well integrated ecnomies.

High inflation will increase nominal rate which will DEPRECIATE that currency

33
Q

How do restrictions on capital flows effect forex values

A

Huge restrictions will bias values downward

34
Q

Capital mobility - how does it effect forex

A

High mobility will significantly increase value of a currency when investment opporunities increase UNTIL the market realises the value is overcooked and it will revert to the mean

35
Q

Portfolio approach - strong economic growth will do what to a currency

A

It will cause inflation, meaning the currency will decrease

36
Q

Forecasting volatility - what the the 2 approaches and the name of the combination of the 2 approaches

A

Sample (using historic, unbias and consistent data to punt on future values_
Factor/Target - stratified sampling (bias and inconsistent)

Sample (times weight) + Target (Time weight) = Shrinkage volatility.

Reduces the effect of outliers in sample data, Great for SMALL data set

37
Q

What is volatility clustering

A

High vol will be followed by high vol periods and VISE VERSA

38
Q

What is the equity risk premium

A

Equity r - 10 yr treasury

39
Q

Grwth rate of RE formula

A

Cap rate + growth of NOI - change in noi %

CFA iii (11 decks)

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