Chapter 12 - Behavior Of The Markets Flashcards
Risk profile of asset classes
Greatest risk, greatest potential return
Risk appetite relates to level of free capital
Fixed interest government bonds exposed to inflation risk
Corporate bonds exposed to default, inflation, marketability, liquidity risk
Equities exposed to default, marketability, inflation risks. Uncertain dividend stream
Supply and demand
As demand rises, price will rise
Demand is price elastic
Interest rates
Short term interest rates government
Control inflation
Encourage economic growth
Manage level of exchange rate
Factors affecting level of bond market
Theories of yield curve
Expectations theory
Liquidity preference theory
Inflation risk premium theory
Market segmentation theory
Factors affecting level of bond market
Theories of the real yield curve
GRY against term to maturity.
Difference between yield curve and real yield curve is expectation of future inflation
Factors affecting level of bond market
Principal economic factors affecting bond yields
Inflation Short term interest rate Public sector borrowing - fiscal deficit Exchange rate Institutional cashflows Returns on alternative investments Other economic factors
Factors affecting level of bond market
Comparison of government and corporate bond yields
Economic factors increase perceived riskiest of corporate bonds, hence yield margin over government bonds
Government bonds poor returns, investors switch to corporate bonds, narrowing gap in yields
Level of equity market
Economic influences in demand
Expectations of real interest rates and inflation
Investors perceptions of riskiest of equity investment
Real level of economic growth
Expectations of currency movements
Level of equity market
Factors affecting supply
Number of rights issues
Share buy backs
Privatizations
Level of equity market
Investor preference influency by
Change in liabilities Change in regulatory or tax regimes Uncertainty in political climate Fashion or sentiment altering No discernible reason Marketing Investor education by suppliers
Level of equity market
Supply factors
Increase in supply, downward pressure on price
Supple increased by new issues, decreased by redemption
Supply government bonds influenced by fiscal deficit and strategy to finance deficit
Supply increased by technological advances
Other influences on investment markets
Demand factors
Investor perception of characteristics of asset
Investors opinions of properties of asset unchanged, external factors alter demand: investors cashflows, investors preferences, price of other assets
