R14 Capital Market Expectations

Question 1

What is the main Objective of Capital Market Expectations

Answer 1

It for deciding on the Strategic Asset Allocation

Question 2

Process for determining Capital Market Expectations

Answer 2

1. Specify final set of expectations with time horizon
2. Research Historical record
3. Specification of methods and models that will be used
4. determine best sources of information
   5 interpret current economic situation using selected data, methods and judgement
5. Formulate needed expectations and record conclusions
6. Monitor, compare to expectations, provide feedback and improvise the process

Question 3

What tools are required to formulate CME

Answer 3

Fomal tools : Statistical tools and models
Analyst Judgement includes : Economic and psycological insight

Also survey and panel methods

Question 4

Economic Out has cyclical and growth trend elaborate on it.

Answer 4

Cyclical Components include
Inventory (measured in terms of fluctuations in inventory and Business Cycle (it is realated to fluctuations in GDP has 5 phases Initial recovery, Early upswign, Late Upswing, Slowdown, Recession.)

The growth trend is the long term growth prospects of GDP useful for setting long term expectations.

Question 5

What is the most important factor affecting GDP

Answer 5

Consumer Spending is most important it accounts for 60 - 70 % of GDP. Retail and consumer consumption are good indicators.

Question 6

How does Govt influence the business cycle

Answer 6

Monetary Policy (it targets Inflation rates and uses central bank's influence to achieve its goal.
and Fiscal Policy

Question 7

How Monetary and Fiscal Policy affect the yield curve

Answer 7

MF tight YC is inverted
M tight F loose YC is Flat
Inverted yield curve often precedes a recession

Question 8

Formula for Grinold Kroner Method

Answer 8

Exp Annual Income + Nominal Earnings Growth (real + Inflation) + Change in PE