Reading 34
Economics And Investment Markets
2 modules 13 min
0/2
Exam Focus
This topic review links real rate of return to investors’ inter temporal rate of substitution. It further uses utility theory to derive risk premium for consumption hedging properties of assets. Be able to identify appropriate risk premiums for different asset classes.
Modules
- Module 34.1Valuation And Interest RatesExplain the notion that to affect market values, economic factors must affect one or more of the following: 1) default free interest rates across maturities, 2) the timing and/or magnitude of expected cash flows, and 3) risk premiums. · Explain the role of expectations and changes in expectations in market valuation. · Explain the relationship between the long term growth rate of the economy, the volatility of the growth rate, and the average level of real short- term interest rates. · Explain how the phase of the business cycle affects policy and short- term interest rates, the slope of the term structure of interest rates, and the relative performance of bonds of differing maturities. · Describe the factors that affect yield spreads between non inflation- adjusted and inflation indexed bonds. · Explain how the phase of the business cycle affects credit spreads and the performance of credit sensitive fixed income instruments.9 min · 6 LOS
- Module 34.2The Business CycleExplain how the characteristics of the markets for a company’s products affect the company’s credit quality. · Explain the relationship between the consumption hedging properties of equity and the equity risk premium. · Explain how the phase of the business cycle affects short term and long term earnings growth expectations. · Describe cyclical effects on valuation multiples. · Describe the economic factors affecting investment in commercial real estate.4 min · 5 LOS