Capital Markets Flashcards
(42 cards)
What is the focus of Section I.C. in the CIMA curriculum?
Global Capital Markets: History and Valuation.
Name three core texts/resources recommended for studying global capital markets.
1) Investment Advisor Body of Knowledge (Dobbs), 2) Portfolio Design (Marston), 3) Investments (Bodie, Kane, Marcus).
What four areas are covered under global capital markets history and valuation?
1) Asset class returns/risks/correlations, 2) Interest rates & inflation, 3) Equity valuation, 4) Linkages to economic growth.
Why is studying the history of asset performance important?
It provides a baseline to assess the current environment and shape future expectations.
What do questions in this section of the exam assess?
Knowledge of defaults, interest/inflation rates, equity valuation, returns, and economic-growth linkages.
What type of market correlation provides the greatest portfolio risk reduction?
Negative correlation between securities.
What does a correlation coefficient of -1 indicate?
A perfect inverse relationship; ideal for diversification.
What happens to asset correlations during a financial crisis?
Correlations typically increase, reducing the benefits of diversification.
According to Roll’s model, what drives stock movement globally?
A common underlying factor, especially during crises.
What impact does globalization have on correlations between markets?
It has increased correlations, particularly since the 1990s.
Is currency hedging generally recommended for international equities?
No, it is typically not helpful or necessary.
What is the equity premium?
The excess return of stocks over the risk-free rate.
How do you calculate the equity premium?
[(1 + stock return) / (1 + risk-free rate)] - 1
What is Tobin’s Q Ratio used for?
To assess whether a market or company is undervalued or overvalued based on asset replacement cost.
What does a Q Ratio below 1 indicate?
The market or company is undervalued.
What is the significance of the PE10 (Shiller’s PE) ratio?
It adjusts earnings over 10 years for inflation to smooth out business cycle effects.
What is the historical relationship between economic growth and capital market returns?
Generally positive but not always strong or causative.
What was the U.S.’s stance on sovereign default historically?
The U.S. has defaulted multiple times, despite the common belief it hasn’t.
What were the ramifications of the Gold Standard?
It helped stabilize prices and limited currency manipulation but lacked flexibility and scalability.
What does the Bretton Woods Agreement of 1944 signify?
It established the U.S. dollar as the world’s reserve currency tied to gold.
What is the correlation value when no risk reduction is possible?
1
What correlation value implies a riskless hedge is possible?
-1
Why is low correlation between assets important?
It lowers overall portfolio risk.
What does a Sharpe ratio of an internationally diversified portfolio indicate?
It is higher than a U.S.-only portfolio, indicating better risk-adjusted return.
