5 Written Questions
5 Multiple Choice Questions
- Explains why currencies may diverge from equilibrium values for extended periods. If investment is greater than domestic savings, then capital must flow into the country from abroad to finance the investment. At the same time the country will have a current account deficit, which would normally indiciate that a currency will weaken, but not in this instance.
- if the earnings yield is lower than the yield on the 10-year TSY, the investor would shift their money into the less risky TSY
- r_target = r_neutral + [0.5(GDP_exp - GDP_trend) + 0.5(i_exp - i_target)]
- 1. determine those needed
2. investigate historical performance
3. identify valuation model
4. collect good data
5. use judgment to interpret current investment conditions
6. formulate capital market expectations
7. monitor performance/refine process
- formulating capital market expectations, related to systematic risk
4 True/False Questions
prudence trap → overly conservative in forecasts because you want to avoid the regret from making extreme forecasts that could end up being incorrect
alpha research → formulating capital market expectations, related to systematic risk
Nine problems encountered in producing forecasts: → 1. Responsible fiscal and monetary policies?
2. What is the expected growth?
3. Does the country have reasonable currency values and current account deficits?
4. Is the country too highly levered?
5. What is the level of foreign exchange reserves relative to short-term debt?
6. What is the government's stance regarding structural reform?
anchoring trap → too much weight on the first set of information received