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Portfolio Management L2 > Economics & Investment Markets > Flashcards

Economics & Investment Markets Flashcards

1
Q

What is the present value model?

A
  • discounting future cash flows to the present so you know the intrinsic value of an investment today. investors would rather have certain amount of money today rather than having to wait until a future date to receive the same amount of money
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2
Q

What is marginal utility?

A
  • margins utility: incremental amount of satisfaction derived from an additional unit of consumption
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3
Q

What is inter-temporal rate of substitution?

A
  • ratio of the marginal utility consumption in the future to the marginal utility of consumption today

inter-temporal rate of substitution = marginal utility consumption in future / marginal utility consumption today

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4
Q

What does the equilibrium bond price reflect?

A
  • reflects average inter-temporal rate of substitution
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5
Q

What is the one period real risk free interest rate inversely related to?

A
  • inversely related to the inter temporal rate of substitution
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6
Q

What is the form that shows one period real risk free interest rate is inversely related to the inter-temporal rate of substitution?

A

rate = 1- price / price

price = mt,1

mt,1 = inter temporal rate of substitution

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7
Q

What does inter-temporal of 0.9515 mean?

A
  • willingness to forego 95.15 today in order to recieve 100 in future
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8
Q

What is the pricing formula for commercial real estate?

A

Price = CF / (1
+ yield to maturity on real regular free investment today
+ expected inflation rate
+ compensation for uncertainty in inflation + credit premium
+ premium for uncertain property value at end
+ liquidity risk premium)

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9
Q

What part of real estate is sensitive to business cycles?

A
  • commercial property values
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10
Q

What is the present value model formula?

A

price = CF / (1
+ yield to maturity on default free investment today
+ expected inflation
+ risk premium on assets

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11
Q

What is the pricing formula for equities?

A

price = CF / (1
+ yield to maturity on default free investment today
+ expected inflation
+ compensation for uncertainty in inflation
+ credit premium
+ equity premium relative to credit risk bonds)

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12
Q

Why is equity premium relative to credit risky bonds needed?

A
  • the additional term of premium is added because debt holders have senior claim in company’s cash flows relative to equity holders
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13
Q

If equity risk premium is expressed relative to default free government bonds what do you substitute the credit premium with formula?

A

credit premium = credit premium + equity premium relative to equity holders

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14
Q

What is the difference between non cyclical and cyclical products?

A
  • non-cyclical: experience steady profits regardless of economic or business cycle
  • cyclical: experience fluctuations in profits often with same fluctuations in business cycles
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15
Q

What is the pricing formula for bonds that contain regular risk?

A

price = CF / (1
+ yield to maturity on regular free investment today
+ expected inflation
+ compensation for uncertainty in inflation
+ credit premium)

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16
Q

What is credit spread?

A
  • credit spread: different in yield between a corporate bond and a government bond of same maturity
17
Q

What is the formula for expected credit loss on a corporate bond?

A

Expected loss = probability of default * (1- recovery rate)

18
Q

What is credit risk in emerging markets?

A
  • difference between yield on bonds in emerging markets minus yield on US treasury bonds
19
Q

How are bond rating related to business cycles?

A
  • the lower the bond is rated the more sensitive to business cycles
  • the higher the bond is rated the less sensitive to business cycles
20
Q

What is the pricing formula for default free long term nominal coupon paying bond?

A

price = CF / (1
+ yield to maturity on real default free investment today
+ expected inflation
+ compensation for uncertainty in inflation )

21
Q

What is the pricing formula for default free short term nominal coupon paying bond (t-bill)?

A

price = CF / (1
+ yield to maturity on real default free investment today
+ expected inflation)

22
Q

What is the Taylor rule?

A
  • guideline for a central bank to manipulate interest rates to try and stabilize the economy
23
Q

What is the Taylor rule formula?

A

target rate (aka policy rate) = real short term interest rate + inflation rate + (0.5* (inflation rate - target inflation rate)) + (0.5* (actual real GDP - potential real GDP))

24
Q

When does Taylor rule being positive and negative mean?

A
  • positive: economy operating above capacity
  • negative: GDP is growing below potential

Portfolio Management L2 (6 decks)

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