Capital Markets Flashcards
Bills and Inflation Correlation
negative correlation between the real rate and the inflation rate means the nominal rate doesn’t fully compensate investors for increased in inflation
Investments in the U.S. Capital Markets from 1926 2016 (Small Cap) Compound Annual Return and SDEV
12.1%, 31.9%
Investments in the U.S. Capital Markets from 1926 2016 (Large Cap)
10%, 19.9%
Investments in the U.S. Capital Markets from 1926 2016 (LT Govt Bond) Compound Annual Return and SDEV
5.5%, 9.9%
Investments in the U.S. Capital Markets from 1926 2016 (US Treasury) Compound Annual Return and SDEV
3.4%, 3.1%
Investments in the U.S. Capital Markets from 1926 2016 (Inflation) Compound Annual Return and SDEV
2.9%, 4.1%
Equity Premium defined
is the excess return of stocks
over the risk-free return over a specific period.
Equity Premium calculation
[(1 + equity return)/(1 + risk free return)] - 1
PE Ratio (Shiller ratio)
also known as the “cyclically adjusted PE” (CAPE); smoothes out fluctuations in earnings due to the business cycle; uses earnings per
share figures adjusted for inflation and averaged over 10 years as the denominator
Q Ratio defined
developed by James Tobin (Yale); a valuation model that says the actual value of all companies
should be equal to the replacement cost of their assets
Q Ratio Formula
Q Ratio = Total Market Value of Firm/Total Asset Value
Q ratio value < 1implies
Value < 1 implies the stock or market is undervalued
Q ratio value > 1 implies
implies the stock or market is overvalued
Emerging versus developed countries valuation comparison
The main takeaway is that emerging markets typically exhibit lower valuations per PE ratios
compared to developed markets over time.
Currency hedging international for equity, helpful or not?
Not
