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 -