Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

CFA > Reading 1 > Flashcards

Reading 1 Flashcards

You may prefer our related Brainscape-certified flashcards:
CFA flashcards
1
Q

Cross Sectional Consistency

A

Consistency across asset classes regarding portfolio risk and return characteristics

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Intertemporal consistency

A

Consistency over various investment horizons regarding portfolio decisions over time

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

9 problems in producing forecasts

A
  1. Limitations to using economic data
  2. data measurement error and bias
  3. limitations of historical estimates
  4. use of ex-post risk and return measures
  5. non-repeating data patterns
  6. failing to account for conditioning information
  7. misinterpreting of correlations
  8. psychological bias
  9. model uncertainty
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Transcription bias

A

misreporting or incorrect recording of information and most serious if biased in one direction

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Asynchronous data

A

more frequent data points are often more likely to have missing or outdated values and can result in distorted correlation calculations

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Conditioning information

A

Historical data reflect performance over many different business cycles and economic conditions. Thus analysts should account for current conditions in their forecasts since for eg relationship between security returns and economic variables is not constant over time.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Anchoring Bias (cognitive)

A

first information received is overweighted

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

status quo bias (behavioral)

A

predictions are highly influenced by the recent past

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

getting over overconfidence bias

A

to counter - consider a range of potential outcomes

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

prudence bias (cognitive)

A

forecasts are overly conservative to avoid regret from making extreme forecasts that could end up being incorrect. can be mitigated by considering a range of potential outcomes.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Availability bias (cognitive)

A

what is easiest to remember often an extreme event) is overweighted

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Econometric analysis

A

uses statistical methods to explain economic relationships and formulate forecasting models. Structural models are based on economic theory, while reduced form models are compact versions of structural approaches.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Diffusion index

A

observing the number of indicators pointing toward expansion versus contraction in the economy

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Business cycle phases

A
  1. Initial recovery
  2. early expansion
  3. late expansion
  4. slowdown
  5. contraction
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Initial Recovery Phase of Business Cycle signs

A
  1. duration of a few months
  2. business confidence rising
  3. government stimulus provided by low interest rates and/ or budget deficits
  4. decelerating inflation
  5. large output gap
  6. low or falling short term interest rates
  7. bond yields bottoming out
  8. rising stock prices
  9. cyclical, riskier assets such as small cap stocks and high yield bonds doing well.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Early expansion

A
  1. duration of a year to several years
  2. increasing growth with low inflation
  3. increasing confidence
  4. rising short-term interest rates
  5. output gap is narrowing
  6. stable or rising bond yields
  7. rising stock prices
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

Late expansion

A
  1. high confidence and employment
  2. output gap eliminated and economy at risk of overheating
  3. rising inflation
  4. central bank limits growth of money supply
  5. rising short term interest rates
  6. bond yields rising
  7. rising/ peaking stock prices with increased risk and volatility
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

Slowdown

A
  1. duration of a few months to a year or longer
  2. declining confidence
  3. inflation still rising
  4. short-term interest rates at peak
  5. bond yields peaking and possibly falling, resulting in rising bond prices
  6. possible inverting yield curve
  7. falling stock prices
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

Contraction

A
  1. duration of 12-18m
  2. declining confidence and profits
  3. increase in unemployment and bankruptcies
  4. inflation topping out
  5. falling short-term interest rates
  6. falling bond yields, rising prices
  7. stock prices increasing during the latter stages, anticipating the end of a recession
20
Q

Disinflation

A

Deceleration in the rate of inflation

21
Q

Deflation is a severe treat to economic activity because

A
  1. encourages default on debt obligations
  2. with negative interest rates decline to near zero and this limits the ability of central banks to lower interest rates and stimulate the economy
22
Q

Quantitative easing

A

Traditionally central banks did OMO, but QE includes other security types like mortgage backed securities and corporate bonds and the intent was long-term increase in bank reserves

23
Q

Neutral Rate

A

The rate that most central banks strive to achieve as they attempt to balance the risks of inflation and recession

24
Q

Taylor Rule Formula for Target Nominal short-term interest rate

A

Neutral real short term interest rate + expected inflation + [0.5 * (expected - long term trend GDP)] + 0.5 [(expected inflation - target inflation)]

25
Q

2 important aspects of fiscal policy

A
  1. it is not the level of the budget deficit that matters, but the change in the deficit.
  2. changes in the deficit that occur naturally over the course of the business cycle are not stimulative or restrictive. in an expanding economy, deficits will decline because tax receipts increase and disbursements to the unemployed decrease. opposite occurs during recession. Therefore, only changes in deficit directed by government policy will influence growth.
26
Q

Yield curve shapes acc to fiscal and monetary policies

A
  1. if both policies stimulative: steep yield curve
  2. if both restrictive: inverted yield curve
  3. monetary restrictive but fiscal expansive: yield curve is flat and implications for economy are less clear
  4. monetary policy stimulative and fiscal restrictive: yield curve moderately steep and implications for economy
27
Q

Pegging of currency

A

Linkage between business cycles of the 2 economies will increase as the pegged currency country must follow economic policies of the country to which it has pegged its currency. if not, investors will favor one currency over the other and the peg will fail.

28
Q

Interest rate differential between pegged currencies

A

Generally interest rate of pegged currency will exceed interest rate of the currency to which it is linked, and the interest rate differential will fluctuate with the market’s confidence in the peg. high confidence = low rate differential.

29
Q

Inflation within expectations: impact on asset classes

A

cash: real rate of interest
bonds: short term yields more volatile than long term yields
equity: no impact given predictable economic growth
real estate: neutral impact with typical rates of return

30
Q

inflation above or below expectations

A

cash: + or - impact with increasing or decreasing yields
bonds: longer term yields more volatile than shorter term yields
equity: negative impact given the potential for central bank action or falling asset prices, though some companies may be able to pass rising costs to customers
real estate: positive impact as real asset values increase with inflation

31
Q

Deflation impact on assets

A

cash: positive if nominal rates are bound by 0
bonds: positive impact as fixed future cash flows have greater purchasing power assuming no default on bonds
equity: negative impact as economic activity and business declines
real estate: negative impact as property values generally decline

32
Q

Process of setting up CME

A

SIIV D Interpret Formulate - Monitor ka dabba

  1. specify set of expectations needed, including time horizons to which they apply
  2. research historical record
  3. specify the methods or models to be used and their information requirements
  4. determine the best sources of information needs
  5. interpret the current investment environment using the selected data and methods, applying experience and judgement
  6. provide the set of expectations needed, documenting conclusions
  7. monitor actual outcomes and compare them with expectations, providing feedback to improve the expectation setting process.
33
Q

Wakuluk started her career when the global markets were experiencing significant volatility and poor returns; as a result, she is now careful to base her conclusions on objective evidence and analytical procedures to mitigate any potential biases.

A

Availability Bias

Wakuluk started her career when the global markets were experiencing significant volatility and poor returns. She is careful to base her conclusions on objective evidence and analytical procedures to mitigate potential biases, which suggests she is seeking to mitigate an availability bias. Availability bias is the tendency to be overly influenced by events that have left a strong impression and/or for which it is easy to recall an example.

34
Q

Non-stationarity of data

A

Different periods in the time series have different statistical properties and create problems with standard statistical methods

35
Q

How do you counter confirmation bias?

A

Give all evidence equal scrutiny and seek out contrary opinion

36
Q

How do you get over overconfidence bias?

A

Consider a range of potential outcomes

37
Q

How do you get over prudence bias?

A

Consider a range of potential outcomes

38
Q

How do you counter availability bias?

A

Base predictions on objective data rather than emotions or recollections of the past

39
Q

Parameter Uncertainty

A

estimation errors in model parameters

40
Q

What are the 3 approaches to economic forecasting?

A
  1. Econometric modeling: structural (based on economic theory) & reduced form (compact version of structural)
  2. use of economic indicators
  3. checklist approach: more subjective like what is the latest report on business investment? etc
41
Q

How does yield curve change with business cycle?

A

As the cycle moves towards expansion, the curve tends to flatten.

At the top of the cycle, the yield curve will likely be flat to inverted.

During contraction, the curve will begin to re-steepen.

42
Q

How is interest rate differential between pegged and currency to which it is pegged impacted?

A

Generally, the interest rates of the pegged currency will exceed the interest rates of the currency to which it is linked and the differential fluctuates with the market’s confidence in the peg.

If high confidence - differential is small.

If there is doubt about the peg - larger differential.

43
Q

What is availability bias?

A

Tendency to be overly influenced by events that have left a strong impression and/or for which it is easy to recall an example

44
Q

Given a developed and a developing country - which country is most likely to have a significant adjustment to their estimate of the future growth trend?

A

Developing

Less developed markets are likely to be undergoing more rapid structural changes, which may require the analyst to make more significant adjustments relative to past trends

45
Q

If a country is in the initial recovery stage, what do you think about interest rates?

A

Must be low and bottoming

46
Q

What impact does increase in transfer payments and introduction of progressive tax regime have on trend growth rate of a country?

A

both are pro-growth government policies and should have a positive impact on the trend rate of growth for a business cycle that is in slowdown or contraction.

Transfer payments help mitigate fluctuations in disposable income for the most vulnerable households, while progressive tax regimes imply that the effective tax rate on private sector is pro-cyclical (rising as economy expands and falling as economy contracts)

47
Q

How does appraisal data impact correlations with other assets?

A

Correlation with other assets tend to be understated,

CFA (21 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions