2021年CFA三级 - Capital Market Expectation

2021年CFA三级 - Capital Market Expectation思维导图，自己总结，供广大备考小伙伴参考，如有差错，请随时指正。谢谢

Framework & Macro Consideration

Capital Market Expectation

Deinition

risk and return expectation in capital market

Consistency

cross-sectional consistency

cross asset classes

intertemporal consistency

overtime

Step to formulate CME

1. determine specific capital market expectations needed accordingly to investor'allowable asset and investment horizon

2. investigate past data to determine drivers

i.e. explanatory variables of return

3. identify valuation model + use requirements

4. collect best data possible

5. interpret current investment condiction + assign required input

6. formulate capital market expectation

7. monitor performance + refine expecation setting process

Challenges for Formulate Expectation

1. Limitations to use economic data

time lag for data collect and distribute

often revised data

often rebased data indexes

2. Data measurement error and bias

transcription errors

record mistakes

surviviorship bias

poor performance data is deleted

overestimate return

hedge fund

appraisal data

inliquid + infrequent priced asset -> smoothier returns

understimate risk

underestimate correlation

e.g. real estate

3. Limiations of historical estimates

short-time period

avoid regime change -> nonstationary data

long-term period

fulfill sample size requirement

more precise estimate

use more frequent data -> asynchronous data

非同步数字

4. The use of ex-post risk and return measure

past data cannot represent future

rare negative events will be excluded as outliers -> underestimate negative cases

underestimate risk + overestimate potential returns

5. non-repeating data pattern

data mining

over-exploit the temporary relationship

time period bias

mitigation: economic sense? + examine modelling process? + test with out-of-sample data

6. fail to account for conditional information

should reflect current conditions in forecast

7. misinterpret correlation

X Y order reverse

determined by a third factor

8. psychological bias

anchoring bias

status quo bias

confirmation bias

overconfidence bias

prudence bias

availability bias

9. model uncertainty

parameter uncertainty

input uncertainty

mdoel uncertainty

Trend Rate of Growth

Formation

cyclical variations

short-term focused

growth trend

long-term focused

Exogenous Shocks

changes in government policy

political events

technological progress

natural disasters

discovery of natural resources

financial crisis

endogenous 考虑在模型内的 + exogenous 不在模型考虑内的

Eco. Growth Rate Forecast = g(labor force/population) + g(labor participation) + g(capital per work) + g(total factor productivity)

Market Forecast Methods

Econometric Modelling

definition

Structural Model

based on economic thoery

Reduced-Form Model

compacted version of structural model

advantages

incorporate multiple variables

can reuse

quantified based on consistent set of relationship

disadvantages

complex and time-consuming to construct

difficult to forecast + changable relationship

unrealistic output + difficult to interpret

does not work will to forecast turning points

Use of Economic Indicators

types

leading indicators

Diffusion Index

use in composition

矛盾的一组指标，看大部分的趋势

for prediction

coincident/lagging indicators

for confirm what happened

advantages

simply, intuitive, and easy to interpret

readily available from third party

can be tailored to meet specific forecasting needs

disadvantage

inconsistent forecasting result

economic indicator may give false signals

revised frequently -> fit past data better than now

Checklist Approach

de: ask questions + interpret

advantages

less complex than econometrics

flexible with mixed objectives

disadvatages

subjective

time-consuming

complexity limited due to manual process

Business Cycle

Tricky Points

vary in duration and intensity + difficult to predict turning points

difficult to distinguish impact of long-term/short-term effects

determined by real eco + investor's expectations + risk tolerance

Inflation

Disinflation

inflation的增速放缓，但依旧是inflation的增长

Deflation

harms

encourage default on debt obligation

limit central banks to lower interest rate + stimulate economy

Quantitative Easing (QE)

use open market operations to increase money supply

decrease short-term interest rates on temporary basis by buying high quality fixed income instruments

more purchase include ABS, corporate bond, intent of long-term bank reserves

Relationship with instruments

Cash

return increase with inflation -> inflation protected

Bonds

inverse related -> inflation leads to higher yield curve/discount rate -> lower bond price -> lower return

Stock

align with inflation expectation

Real estate

align with inflation expectation

详见笔记本补充金程网课

Montery & Fiscal Policy

Taylor Rule

Nagative interest rate

2021年新增内容

Fiscal Policy

focus on change in the deficit

natural chage in the deficit over business cycle

not stimulative or restrictive

看认为变动为主

Yield Curve relationship

International Considerations

Complex relationship between exchange rate and interest rate

X-M = (S-I) + (T-G)

Captial account deficit <=> current account deficit

pegged exchange rate

promote economic stability

interest related to BUT higher than the pegged country

economic policy follow the pegged country

interest rate of pegged currency > linked currency

confidence high -> dif. small

confidence low -> dif. large + value lose -> to compensate risk

Forecast Asset Class Returns

Fixed Income

Discounted Cash Flow Model (DCF)

dif. of realized return & YTM

sell before maturity

changable interest rate

invest horizon < Macaulay Duration

interest rate fall

capital gain > reinvestment loss

higher return

interest rate rise

capital loss > reinvestment gain

lower return

invest horizon > Macaulay Duration

interest rate fall

capital gain < reinvestment loss

lower return

interest tate rise

capital loss < reinvestment gain

higher return

Risk Premium (Building Block) Approach/Equlibrium Model

risk-free rate

short-term default free rate

calculate from most liquid instrument

close to gov. zero-coupon yield + central bank policy rate

term premium

major factors

inflation uncertainty +

recession hedge

inflation due to aggregate demand -

inflation due to aggregate supply +

supply and demand

the bond itself

business cycle

other indicators

ex ante (forecast) real yield

Cochrane and Piazzesi curve factor

yield curve slope measurement

Kim and Wright premium

three-factor model of the term structure

slope of yield curve

supply indicator

proportion of debt with a maturity greater than 10 years

cyclical proxies

coporate profit-to-GDP ratio

business confidence

unemployment rate

Credit premium

risk higher

shorter maturity -> due to Event Risk

iliquidity

strategy to take advantage

take shorter maturity's credit risk + duration risk from long maturity

liqudity premium

highest of new issurance bond

e.g. newest sovereign bond issues, current coupon mortgage-back security, high quality bond

issue at/close to par or market rate

new

large in size

issued by frequent and well know issuer

simple in structure

high credit quality

Emerging Market Bond

Risk

wealth concentration

dominance of cyclical industries, e.g. commodity and less pricing power

capital flow and trade restriction

inadequate fiscal and monetary policy

poor work force + infrastructure + week tech advancement

large foreign currency borrowing

less developed + small capital markets

exposure to volatile capital flows

Health guidance

e.g. strcutural form, policy, government is also important

Equity

Discounted Cash Flow Model (CDF)

suit for long-term valuation

Gordon Growth Model/Constant Growth Model

growth rate = nominal growth in GDP = real g + inflation

Grinold-Kroner Model

features

adjust for stock repurchase

assume an infinite time horizon

workable in long-run

cannot assume P/E ratio is constant growth

P/E ratio rever to mean in the long-run

E(R) = D/P + (% delta(E) - % delta(S)) + % delta(P/E)

expected return = dividend yield + (exp. % change in total earnings) + ( exp. % change in share outstanding)(share repurchase) + exp. % change in the P/E ratio

3 components

exp. income return/exp. cash flow return

D/P - %delta(S)

exp. nominal earning growth

%delta(E)

exp. repricing return

%delta(P/E)

E(R) = (D/P - % delta(S))+ % delta(E) + % delta(P/E)

Risk Premium Approach/Equilibrium Approach

Singer-Terhaar Model

Real Estate

Real Estate Cycle

Boom - increase demand -> higher property value + lease rate

Bust - lower demand -> overcapacity + overbuilding -> lower vale + lease rate

Capitalization Rate/Cap Rate

= net operating income (NOI)/property value

= E(R) - NOI growth rate

NOI growth rate close to GDP growth rate in the long-run

NOI is a nominal measure

assumption: infinite time period

E(R) - NOI growth rate - %delta(cap rate)

assumption: finite time period

+ change in interest rate + vacancy rate

把cap rate想象成cost of investment in real estate，interest rate和vacancy rate越高，说明进入市场的难度和收益率越低，所以cap rate低；availability of financing and credit 越高，说明cost of investment越低，所以cap rate低

- availabilty of credit - availability of debt financing

Risk premium

term premium

long-term asset

credit premium

not pay tenant

equity risk premium

fluctuation in real estate value, leases, vacancy

liquidity risk premium

adjustment for use model

impact of smoothed data

illquidity premium

consider local real estate nature -> not global

return -> between bond and equity

Types

public real estate

e.g. REIT -> benefit from diversification

private real estate

residual real estate

Exchange Rate

Factors from Trade

net trade flows

purchasing power parity

competitiveness and sustainability of current account

reasons of current account structual imbalance

persistent fiscal imbalance

demographics and trade preference impact saving decisions

abundant/scare resouces

avaliability of viable investment opportunities

terms of trade

Adjustments to Capital Flows

capital mobility

uncovered interest rate parity

Hot Money

create monetary issues

1. limit central bank's effective use of monetary policy

2. firms use short-term financing to fund long-term investment, increase financial market risk

3. overshoot exchange rate -> create business disruption

mitigation: sell gov. security + maintain interest rate targets

to reduce the money supply in market

portfolio balance and composition

strong eco. country's currency -> more supply in global market -> weaken the current + higher risk premium

mitigations

strong home bias -> absort new assets

fund with financial flows + foreign direct investment

small/emerging country experience high trend rates

large current account deficit

due to large investment spending are eaiser to finance, if profitable

help provide global liquidity and provide benefits to financial markets

Volatility

VCV Matrix

Sample VCV Matrix

No. of observations >> 10 * No. of portfolio assets

advantage: consistent + unbaised

disadvantage: large sample required -> N(N-1)/2

Factor-Based VCV Matrices

advantage

reduce the required No. of observation

simplify the number of calculations used in VCV matrix

K(K-1)/2

disadvantage

biased matrix

estimated inputs + misspecified

inconsistent matrix

sample size increase -> lead to untrue model

Shirnkage Estimate

weighted average estimate of the above 2 methods

the above 2 methods' mitigation

Smoothed Returns to Estimate Volatility

adjust smoothing to avoid distorted and suboptimal asset allocation

weighted average of true returns + previously observed returns

disadvantage: true returns are not observable + estimate

ARCH Model

volatility clustering

alpha + beta < 1

Global Portfolio Adjustment

combine knowledge from all above sections

trend rate

good to equity +

bad to bond price -