Economic Analysis

Question 1

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Permanent income hypothesis

Answer 1

The hypothesis that consumers’ spending behavior is largely determined by their long-run income expectations

Question 2

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Mean-Variance Optimization (MVO)

Answer 2

E(r), σ (std deviation), ρ (Correlation)

Question 3

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Challenges in Forecasting

Analyst Behaviour Traps

Answer 3

OSCAR P.

Overconfidence Trap

Status quo

Confirming evidence trap

Anchoring

Recallability

Prudence (heard)

Question 4

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Singer-Terhaar International (Equity Risk Premium)

Answer 4

1. ERP_Segmented = σ_asset * Sharpe_GIM (Er - rf / σ_GIM) + illiquidity premium
   ERP_Integration = σ_asset * ρ_asset * Sharpe_GIM (Er - rf / σ_GIM) + illiquidity premium
2. Weight risk premiums

. Degree of integration * ERP_Integration / (1 - Degree) * ERP_Segmented

3. ERP = wERP + rf

Other. Mkt Beta = (σ_i * ρ_i,GIM) / σ_GIM

Question 5

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Taylor Rule

Answer 5

Taylor Rule: r_target = r_neutral + [0.5 (GDP_expected − GDP_trend) + 0.5 (i_expected − i_target)]

Question 6

•••••••Economic Analysis•••••••

Cobb-Douglas production function (CD):

Answer 6

Y = AK^α L^β or ΔY/Y

ΔY ≅ ΔA/A + α*ΔK/K + (1−α) *ΔL/L

α = output elasticity of capital

β = output elasticity of labor

α + β = 1.0

A = Solow residual or TFP (not directly observable)

• Change due to technology; capital flows and labor mobility; trade restrictions; laws; division of labor; natural resources.

K = Capital

L = Labor

Question 7

•••••••Economic Analysis•••••••

DDM H-model

Answer 7

High growth that linearly decays to a perpetual growth state

Question 8

•••••••Economic Analysis•••••••

Earnings Yield

Answer 8

E1 / P0 = (ke – g) / payout

g = ROE * (1 – payout)

r = D1/P0 + g

Question 9

•••••••Economic Analysis•••••••

Relative Valuation Models (using Earnings Yield)

Answer 9

1. Fed model: Equity Earnings Yield_n+1 vs. Bond Yield _{10-year <strong>Government</strong> Treasuries}
   
   • Includes no equity risk premium, ignores earnings growth, and compares a real variable (earnings yield) with a nominal variable (bond yield).
2. Yardeni model: addresses some of the criticisms using a corporate bond yield as a proxy for the riskiness of equities. Equity Earnings Yield_n+1 vs. Bond Yield_{10-year <strong>Corporate A rated</strong> yield} – d * (g_Long)
   
   • D is a weighting factor that depends on the mkt focus on earnings (use 0.1)
3. Cyclically adjusted P/E ratio (CAPE): Real price of the S&P 500 / moving average of past 10 years’ normalized real EPS. Mean reverting over the longer run.

Question 10

•••••••Economic Analysis•••••••

Asset Valuation Models

Answer 10

1. Asset Valuation Models
   
   1. Tobin’s Q = (MV_equity + MV_debt) / Replacement cost of assets
   2. Equity Q = Mkt Cap Equity / (Assets at replacement cost - MV_debt)
   3. Price / Book Value

Question 11

•••••••Economic Analysis•••••••

Bond-yield-plus-risk-premium

Answer 11

Bond-yield-plus-risk-premium = YTM_{long-term government bond} + Equity risk premium

(no inflation, illiquidity or corporate bond)

Question 12

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Grinold–Kroner: Expected Return for Equities

Answer 12

E(R) = D/P ‒ ∆S + i + g + ∆PE

E(R) = expected rate of return on equity

D/P = expected dividend yield

∆S = expected percent change in number of shares outstanding (repurchase is negative)

i = the expected inflation rate

g = the expected real total earnings growth rate (not identical to EPS growth rate in general, with changes in shares outstanding)

∆PE = per period percent change in the P/E multiple (DEIXAR NA BASE CORRETA O CRESCIMENTO)

Question 13

•••••••Economic Analysis•••••••

Monetary / Fiscal Policies impact in Yield Curve

Answer 13