2019 CFA level 3 qbank r 16 17 capital market expectations equity market val questions

The following table re ects economic data for Market Q:Expected growth in total factor productivity 1.0% Expected growth in the labor 2.0% Expected growth in capital stock, α = 0.4 1.2%

Trang 1

Question #1 of 99

Which of the following is consistent with a at yield curve?

A) Monetary policy is expansive while scal policy is restrictive.

B) Monetary policy is restrictive while scal policy is expansive.

C) Monetary policy is restrictive and scal policy is restrictive.

Which of the following would be consistent with Country A having higher real interest rates

than Country B?

A) Country A has a looser monetary policy and a faster growing economy.

B) Country A has a tighter monetary policy and a slower growing economy.

C) Country A has a tighter monetary policy and a faster growing economy.

Trang 2

The following table re ects economic data for Market Q:

Expected growth in total factor productivity 1.0%

Expected growth in the labor 2.0%

Expected growth in capital stock, α = 0.4 1.2%

Using the Cobb-Douglas production function and the data provided, the expected growth

(percentage change) in real economic output for Market Q is closest to:

A) 2.7%.

B) 3.2%.

C) 3.0%.

Which of the following is NOT a characteristic of economic indicators as used in economic

forecasting? Economic indicators:

A) are di cult to understand and interpret.

B) can be adapted for speci c purposes.

C) have an e ectiveness that has been veri ed by academic research.

Trang 3

Of the following investment strategies, which one would bene t most from a bottom-up

forecasting approach in predicting equity returns?

A) Allocating invested funds across various markets.

B) Buying and selling individual securities to capture short-term pricing ine ciency.

C) A macro hedge fund manager allocating funds among currency markets.

Which of the following is NOT an input to the Taylor rule?

A) The expected GDP.

B) The discount rate.

C) The neutral rate.

Which of the following statements regarding spending and the business cycle is least accurate?

A) The inventory cycle is shorter than the business cycle.

B) As a percentage of GDP, consumer spending is much larger than business spending.

C) Business spending is less volatile than consumer spending.

www.ombookcentre.in

Trang 4

The following data pertains to an equity market index.

Last dividend (D0) 100

Forecast earnings per share 300

Current and sustainable long-term growth

Required return 7.5%

Yield on 10-year government bond 6.0%

Using the data in the table, the intrinsic price level of the equity market index is closest to:

A) 2,000.00

B) 2,929.00

C) 2,050.00

Which of the following is consistent with a likely weak economy in the future?

A) Monetary policy is expansive and scal policy is expansive.

B) Monetary policy is restrictive while scal policy is expansive.

C) Monetary policy is restrictive and scal policy is restrictive.

Which of the following is most representative of an exogenous economic shock?

A) Ongoing expansionary scal policy by the federal government leading to higher

in ation and interest rates

B) A hurricane hitting the Gulf of Mexico resulting in the shut-down of many oil wells and

re neries and to higher oil prices

C) Anticipated loose monetary policy by a country’s central bank leading to in ation and to

depreciation in the country’s currency

www.ombookcentre.in

Trang 5

Which of the following statements regarding emerging market government debt is most

accurate? Emerging market government debt is usually denominated in:

A) a non-domestic currency which makes them less credit risky.

B) a non-domestic currency which makes them more credit risky.

C) the domestic currency which makes them more credit risky.

Which of the following statements regarding Tobin's q and the equity q is least accurate?

A) The equilibrium value for both Tobin’s q and the equity q is 1.

B) Tobin’s q compares the current market value of a company to the replacement cost of

its assets

C) The equity q compares the aggregate market value of the rm’s equity to the market

value of the rm’s net worth

Which of the following is NOT indicative of low risk in an emerging market economy?

A) Foreign exchange reserves are twice that of the short-term debt.

B) A foreign debt level that is 75% of GDP.

C) A current account de cit that is 2% of GDP.

If in ation rises, the yields for TIPS will:

www.ombookcentre.in

Trang 6

A) rise and their price will fall.

B) fall and their price will rise.

C) rise and their price will rise.

An equity market's forecasted EPS is 15.30 Assuming a required real return on equity of 8%, a

current dividend of 10, current supernormal growth of 9.5%, a long-term sustainable rate of

growth of 2.0%, and a 20-year period of linear growth decline, the estimated forward

price-earnings ratio (P0/E1) of the market is closest to:

A) 15.4.

B) 19.3.

C) 23.1.

Given an S&P 500 forward earnings yield of 7.2% and 10-year Treasury notes yielding 2.68%,

which of the following interpretations of this data using the Fed model is most accurate?

A) The spread between the S&P 500 earnings yield and the Treasury notes is too great to

make an informed decision

B) Since the S&P 500 is earning signi cantly more than the Treasuries this indicates the

S&P 500 equity market is overvalued

C) The S&P 500 earnings yield is higher than the Treasury yield indicating that equities are

undervalued and should increase in value

A top-down forecast of earnings per share for an equity market index is best described as:

www.ombookcentre.in

Trang 7

A) using macroeconomic factors to estimate the performance of market-wide indicators.

B) taking a microeconomic perspective by focusing on the fundamentals of individual

A) The economies are often heavily dependent on consumer durables.

B) Their undiversi ed nature makes them susceptible to volatile capital ows and

economic crises

C) Equity investors should focus on growth prospects and risk.

Which of the following is NOT a characteristic of a good forecast using capital market

expectations? The forecasts:

A) are subjectively formed.

B) have a minimum amount of forecast error.

C) are consistent with the forecasts used for other assets.

If population is expected to grow by 3%, labor force participation is expected to grow by 0.25%,

spending on new capital inputs is projected to grow at 2.75% and total factor productivity will

grow by 0.75% What is the long-term projected growth rate?

A) 5.75%.

www.ombookcentre.in

Trang 8

A) can provide precise quantitative forecasts of economic conditions.

B) provides a straightforward method of creating a model.

C) is better at forecasting expansions than recessions.

Which of the following statements about the Cobb Douglas production function is least

accurate? The Cobb-Douglas production function assumes the:

A) output elasticities of capital and labor, α and β, sum to 1.0.

B) growth in total factor productivity (TFP) is zero when constant returns to scale are

present

C) growth in economic output must be less than the growth in corporate earnings.

Which of the following is the best interpretation of the 10-Year Moving Average Price/Earnings

Ratio (also referred to as the P/10-year MA(E))?

A) By comparing the 10 year moving average P/E ratio for a market to the current P/E ratio

we can determine whether or not the market is over or under priced

B) A 10 year moving average P/E ratio greater than the current P/E ratio for a market

indicates the market is currently undervalued

www.ombookcentre.in

Trang 9

C) The numerator of the P/10-year MA(E) is the value of the S&P 500 price index, and the

denominator is the average of the previous ten years’ reported earnings

Frank Bowden is formulating the expected returns, standard deviations, and correlations for

bonds and equities given global economic forecasts Tom Weatherford is examining the returns

to a U.S small-cap stock based on analyst's forecasted returns versus the capital asset pricing

model and the security market line Which of the following about Bowden and Weatherford is

most accurate?

A) Bowden is performing beta research and Weatherford is performing alpha research.

B) Bowden is performing alpha research and Weatherford is performing beta research.

C) Bowden is performing beta research and Weatherford is performing beta research.

Which of the following statements most accurately describes the relationship between the

intrinsic value of an equity market index and the input variables in the H model? The intrinsic

value of an index is:

A) positively related to the growth rate and length of the period of decline but negatively

related to the required return

B) negatively related to the growth rate but positively related to the length of the period of

decline and required return

C) positively related to the growth rate and required return but negatively related to the

length of the period of decline

If a cash manager thought the economy was going to have a robust recovery, (s)he would:

www.ombookcentre.in

Trang 10

A) shift from longer-term cash instruments to shorter-term cash instruments and from

more credit worthy instruments to less credit worthy instruments

B) shift from longer-term cash instruments to shorter-term cash instruments and from

less credit worthy instruments to more credit worthy instruments

C) shift from shorter-term cash instruments to longer-term cash instruments and from

more credit worthy instruments to less credit worthy instruments

Which of the following statements regarding global economies is most accurate?

A) Neither emerging nor developed country economies are perfectly integrated.

B) Both emerging and developed country economies are perfectly integrated.

C) Developed economies are perfectly integrated but not emerging countries.

www.ombookcentre.in

Trang 11

Suppose a cash manager has an investment horizon of one-year She has the choice of

investing in either commercial paper with a maturity of six-months or commercial paper with a

maturity of one-year If she pursues the former, she will roll over her investment in six months

to another six-month instrument The current rates are 5% annually on the six-month

commercial paper and 5.5% for the one-year maturity commercial paper If in six months, the

yield for six-month commercial paper is 5.2% annually, should she invest in the two six-month

instruments or the one-year commercial paper? Also assume that she can utilize this strategy in

either Country A or Country B If Country A has a savings de cit and Country B has a savings

surplus, which country should she invest in if she is using a savings-investment imbalances

approach to forecast currency values?

Trang 12

A) survivorship bias and hence downward biased returns.

B) survivorship bias and hence upward biased returns.

C) back ll bias and hence upward biased returns.

The Yardeni model is best explained as:

A) a variation of the constant growth dividend discount model in which earnings are used

instead of dividends, the yield on A-rated corporate bonds is substituted for r the

B) being able to value the market by applying the model as a ratio with a value greater

than 1 indicating the market is overvalued

C) a variation of the constant growth dividend discount model in which earnings are used

instead of dividends

Which of the following statements is least characteristic of the bottom-up method of

forecasting investment returns?

A) The analyst compares expected performance of various indices to general asset classes.

B) Assessing a rm’s management to determine its willingness and ability to adopt

technology to remain competitive in the market place

C) Cash ow analysis is used to determine a rm’s investment potential.

Trang 13

C) A government committed to structural reform.

Suppose the United States has higher in ation than Japan The United States is in the late

expansion phase of the business cycle and Japan is in the initial recovery phase Using only the

PPP relationship for forecasting currency values and using the relationship between asset class

returns and the business cycle, which asset should the manager invest in?

A) Japanese stocks.

B) Japanese bonds.

C) U.S bonds.

Which of the following statements best identi es and explains which bond is used as the

expected return for a bond segment?

A) A zero coupon bond, because of the reinvestment rate assumption.

B) A coupon bond, because of the reinvestment rate assumption.

C) A zero coupon bond, because of the maturity assumption.

Which of the following describes a method of setting capital market expectations where a

consistent set of experts is asked for their opinion regarding the future?

A) A market-adjusted algorithmic method.

B) An algorithmic method.

C) A panel method.

www.ombookcentre.in

Trang 14

Which of the following is NOT a substantial component of the change in the long-term growth

rate in an economy?

A) Changes in spending on new capital inputs.

B) Changes in employment levels.

C) Changes in consumer spending.

When using dividend discount models to evaluate the sensitivity of equity market value

estimates to changes in input variables, which input variable remains constant?

A) The number of years (N) to reach the sustainable growth rate because it is assumed to

decline in a constant linear fashion

B) The sustainable growth rate since it is assumed to remain at a constant stable rate.

C) The current dividend (D0) since it is not an estimate

An analyst has gathered the following data for a developed market index:

% Growth in Total

Factor Productivity

% Growth

in Capital Stock

% Growth

in Labor Input

Output Elasticity of

Capital (α)

Output Elasticity of

Labor (1 − α)

1.0 1.0 1.5 0.7 0.3

If the next expected dividend is 150 and the required equity return is 8%, the intrinsic price

level of the equity index is closest to:

A) 2,564.00

B) 2,396.00

C) 2,620.00

www.ombookcentre.in

Trang 15

Which one of the following represents possibly the most di cult task the government faces in

the event of an exogenous shock?

A) Rebuilding infrastructure after a natural disaster.

B) Being able to lower interest rates in a de ationary environment.

C) Preventing the shock from becoming a contagion and spreading to its own country.

Which of the following statistical tools adjusts historical estimates using a weighted average of

the historical value and an analyst-determined value?

A) Shrinkage estimator.

B) Time series analysis.

C) Multifactor model.

Xavier Fellows works in the research department of Multinational Inc., a large investment bank

He is tasked with forecasting economic conditions to support the bank's money managers and

traders

Fellows takes his work seriously and is considered to be an excellent forecaster His economic

forecasts are updated monthly and sent to most of Multinational's analysts and money

managers The analysts use Fellows' forecasts as the basis for their own research on speci c

securities or asset classes

However, Fellows is concerned that his forecasts are not accurate enough In an e ort to avoid

making mistakes, Fellows follows a detailed process to develop accurate and usable forecasts

Fellows hopes that this process will help him avoid some of the common problems of forecasts

Here is his system:

1 Establish a benchmark for market expectations Multinational serves thousands of clientswith di erent investment goals and constraints, and Fellows knows analysts will need the

www.ombookcentre.in

Trang 16

di erent benchmarks for a variety of di erent types of investors.

2 Look at the historical returns of a number of asset classes to act as a check on forecastsfor each asset class

3 Assemble data on historical returns and valuations for all relevant asset classes,considering potential biases, adjusting the numbers to account for di erent calculationmethods, and ensure that data de nitions match those used by the company thatcollected the data

4 Interpret the data Fellows uses his years of experience to extrapolate that data intogrowth and valuation assumptions for each asset class This step is the most subjective

5 Distill assumptions into top-down forecasts, detailing the assumptions and methods forinterpreting historical data in the event that individual analysts want to use data tocreate their own industry-speci c forecasts

6 Monitor performance If Fellows' forecasts prove to be inaccurate, he works to improvehis models

This month's forecast dwells heavily on in ation projections and their expected e ect on the

returns of di erent asset classes Fellows projects a decline in in ation and predicts that bond

yields have bottomed out

Stock analyst Karen Andrews calls Fellows after the report is released with some questions

about his analysis She is pleased with the work, but a bit disappointed that he did not include

information on current and estimated bond yields

Andrews asks Fellows to forward his analysis of the in ation picture to Carol Huggins, a

colleague who works in the bank's management business Huggins consults on

money-management issues with large clients and is very interested in in ation projections

Lester Can eld, who manages money on a discretionary basis for high-net-worth individual

investors, is also interested in Fellows' forecast After reading the entire document, he decides

to sell some of his clients' interest in a limited partnership that develops and manages real

estate, and invest that money in high-yield bonds Can eld's reasoning is threefold:

Can eld believes the partnership has excellent return potential, but he is the only onewho expects such robust results The bonds seem to be a safer investment, and Can elddoes not want to guess wrong

Historically, average high-yield bond returns are higher than the returns of real estatepartnerships

During periods of falling in ation, real estate investments often lag the market

www.ombookcentre.in

Trang 17

Before making the move, Can eld calls Fellows to get an opinion on his plan After hearing

Can eld's rationale, Fellows advises against the move into high yield bonds

Fellows skipped a step in his technique for producing forecasts He forgot to:

A) identify where he obtained his data.

B) assure that the underlying data is accurate.

C) identify a valuation model used in his analysis.

Fellows' advice to Can eld suggests Can eld is least likely su ering from:

A) the recallability trap.

B) the prudence trap.

C) failing to use conditioning information.

Andrews most likely requested bond yields because she wanted to:

A) develop a shrinkage estimate.

B) analyze stock-market valuations using the risk premium approach.

C) gauge potential xed-income investments.

Which of the following is least likely a common problem encountered in forecasting?

A) Failing to account for conditioning information.

www.ombookcentre.in

Trang 18

B) Data measurement errors and biases.

C) It is di cult to use multiple regression analysis.

Due to the decline in in ation and the low bond yields, Fellows should conclude that the

economy is most likely in what stage of the business cycle?

A) Late expansion.

B) Slowdown.

C) Initial recovery.

Which of the following is least accurate regarding in ation?

A) Declining in ation results in declining economic growth and asset prices.

B) Highly levered rms are most a ected by declining in ation rates.

C) Low in ation a ects the return on cash instruments.

A Tobin's q value for an equity market of greater than 1 can be interpreted as the:

A) market is over or under-valued depending upon the equilibrium value.

B) market is over-valued and will revert back to a value of 1.

C) replacement cost of assets is over stated.

www.ombookcentre.in

Tiêu đề	2019 CFA Level 3 Qbank R 16 17 Capital Market Expectations Equity Market Val Questions
Trường học	Kaplan
Chuyên ngành	Capital Market Expectations
Thể loại	question bank
Năm xuất bản	2019
Thành phố	N/A

Định dạng
Số trang	36
Dung lượng	781,57 KB