CME

Question 1

Initial recovery

Answer 1

Inflation - declining
Economic policy - stimulative
Short term rates low or declining
Long term rates bottoming
Stock price increasing

Question 2

Early expansion

Answer 2

Low inflation and good economic growth
Becoming less stimulative
Short term rates increasing
Long term rates bottoming or increasing

Question 3

Late expansion

Answer 3

Inflation increasing
Becoming restrictive
Short and long term rates increasing

Question 4

Slowdown

Answer 4

Inflation continues accelerating
Becomes less restrictive
Short and long term rates peaking and then declining

Question 5

Contraction

Answer 5

Monetary policy - easing
Short term and long term rates declining with bond prices increasing

Question 6

Econometric analysis

Answer 6

Uses statistical methods to explain economic relationships and formulate forecasting models

Question 7

Checklist approach

Answer 7

An analyst considers a series of questions
Then he uses judgement and perhaps statistical modeling to interpret answers

Question 7

Checklist approach

Answer 7

An analyst considers a series of questions
Then he uses judgement and perhaps statistical modeling to interpret answers

Question 8

Rules of immunizing a single liability

Answer 8

1. Initial portfolio market value (PVA) equals (or exceeds) PVL. (There are exceptions to this for more complex situations where the initial portfolio IRR differs from the initial discount rate of the liability.)
2. Portfolio Macaulay duration matches the due date of the liability (D = DL).
3. Minimize portfolio convexity (to minimize dispersion of asset cash flows around the liability and reduce risk to curve reshaping).
4. Regularly rebalance the portfolio to maintain the duration match as time and yields change. (But also consider the tradeoff between higher transaction costs from morefrequent rebalancing versus the risk of allowing durations to drift apart.)

Question 9

Rules of immunizing multiple liabilities

Answer 9

1. Initial portfolio market value (PVA) equals (or exceeds) PVL. (There are exceptions to this for some situations where the initial portfolio IRR differs from the initial discount rate of the liability.)
2. Portfolio and liability basis point values match (BPV = BPVL)
3. Asset dispersion of cash flows and convexity exceed those of the liabilities. (But not by too much, in order to minimize structural risk exposure to curve reshaping).
4. Regularly rebalance the portfolio to maintain the BPV match of A and L as time and yields change.

Question 10

What’s shrinkage estimation

Answer 10

Shrinkage estimation involves taking a weighted average of a historical estimate of a parameter and some other parameter estimate, in which the weights reflect the analyst’s relative belief in the estimates.

Question 11

Deficit to GDP ratio

Answer 11

Shouldn’t be more than 4%

Question 12

Debt to GDP ratio

Answer 12

Not more than 70-80%

Question 13

Real growth rate

Answer 13

More than 4%

Question 14

Current account deficit

Answer 14

Not more than 4%

Question 15

Foreign debt levels

Answer 15

Not more than 50% of GDP
Not more than 200% of current account receipts

Question 16

Appraisal data bias

Answer 16

Appraisal data bias occurs when asset valuations are based on subjective appraisals rather than market prices, leading to smoothed or understated volatility and risk in reported data. This can cause an overestimation of portfolio stability, as the appraised values may not reflect true market fluctuations. correlations are understated

Question 17

prudence bias

Answer 17

The prudence bias is the tendency to temper forecasts so that they do not appear extreme or the tendency to be overly cautious in forecasting.