S7 Flashcards

1
Q

Cobb-Douglas production function

A

Y = A * K^a * L^b
a + b = 1
Total economic output = Total factor productivity * Capital stock ^ output elasticity of Capital * Labor input ^ output elasticity of labor

K = eg Spending on raw materials

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2
Q

Economy Total Factor Productivity TFP can change over time due to

A
  • changing technology
  • changing restrictions on capital/labor flows
  • changing trade restrictions
  • changing laws
  • changing division of labor
  • Depleting/discovering of Natural Resources
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3
Q

H model

A

P = D0 / (r-gl) * ( ( 1+ gl ) + N / 2 * (gs-gl) )

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4
Q

Sustainable growth rate in GDP (based on Cobb Douglas production function) ===

A

Delta Y = Delta A + a * Delta K + (1-a) * Delta L

Delta A = Solow Residual

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5
Q

Relative value models

A

Fed model
Yardeni model
10yr MA price / earnings model

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6
Q

Fed model ratio =

A

= S&P yield / 10yr Treasury yield
=> if larger than 1 - equities are undervalued (or larger than long term average)

where S&P yield = Operating earnings / S&P value

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7
Q

Flaws of Fed model

A
  • ignores equity risk premium
  • ignores earnings growth for denominator
  • compares real variable (S&P index) to nominal variable (Treasury yield)
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8
Q

Yardeni model =

A

Yardeni earnings yield = E1 / P0 = Yb - d ( LTEG )

Market undervalued if we have “>” instead of “=”

Yb = yield on A-rated corporate bonds (i.e. RFR + default premium)
d = weighting factor for the importance of earnings growth = historically 0.10
LTEG = long term earnings growth
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9
Q

Things to remember about Yardeni model

A
  • incorporates a proxy for equity market risk premium (yield of A-rated bonds)
  • risk premium used is actually a measure of default risk - not a true measure of equity risk
  • model relies on estimate of the value investors place on earnings growth (d), which is assumed to be constant over time
  • LTEG assumptions might not be an accurate estimate of LT sustainable growth
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10
Q

10 yr MA P/E =

A

current market value / 10 year historical average of REAL earnings

Both denominator and numerator of historical ratio are adjusted to inflation (CPI) when are compared to current ratio

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11
Q

10 yr MA P/E … things to remember

A
  • restating to CPI the impact of inflation is removed
  • using 10 year - it captures the effects of business cycles
  • doesn’t consider effects of changes in accounting rules/methods
  • very high and low ratios have persisted historically - limiting usefulness in forming short term expectations
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12
Q

Tobin q model (asset based valuation model) - FORMULA and STRENGTHS / WEAKNESSES

A

= asset MV / asset replacement cost = ( MV of debt + MV of equity ) / asset replacement cost

Strength: easy to use (due to mean reversion) , demonstrated usefulness via negative correlation to equity return

Weakness: replacement costs difficult to estimate, deviations may persist

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13
Q

Equity q (asset based model) - FORMULA and STRENGTHS / WEAKNESSES

A

= equity MV / replacement value of net worth (net assets) = market cap / (replacement value of assets - liabilities )

Strength: easy to use (due to mean reversion) , demonstrated usefulness via negative correlation to equity return

Weakness: replacement costs difficult to estimate, deviations may persist

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14
Q

In top-down forecast, the analyst utilizes

A

macroeconomic factors to estimate performance of market wide indicators

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15
Q

In bottom-up forecast, the analyst first takes

A

micro-economic perspective by focusing on the fundamentals of individual firms

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16
Q

intrinsic price level of the index =

A

DIVIDEND * (1 + g) / ( r - g )

17
Q

Solow residual

A

% change in total factor productivity

18
Q

when both top down and bottom up approaches are recommended simultaneously

A

When approaching or leaving recessions, management expectations can be biased. It would be wise in these situations for the bottom-up analyst to also utilize a top-down approach to confirm earnings estimates.

  1. help analyst better understand market consensus
  2. reveal a gap that gives rise to significant market opportunities
19
Q

1 example of investors using top-down approach

A

global macro hedge fund

20
Q

2 example investors using bottom-up approach

A

market neutral strategies, alpha focus via stock selection

21
Q

Aging a problem in what BRICs?

A

Russian and China

22
Q

GDP per capita to remain below developed countries in all BRICs except

23
Q

One third of US GDP growth to come from

A

Currency appreciation

24
Q

BRICS with expected strongest tech progress

A

China Russia

25
Q

conditions for sustained economic growth in BRICs

A

Macroeconomic stability
Institutional efficiency
Open trade
Worker education

26
Q

When yield curve is flat it means that policy is

A

monetary restrictive, fiscal expansionary

27
Q

benefits of bottom up approach

A

= can help identify attractively prices securities irrespective of attractiveness of the sector

= may be a better fit for investors who focus on a market niche

28
Q

yardeni better than fed because it

A

includes LTEG