CME

Question 1

Give two advantages and disadvantages of econometric approach

Answer 1

• model can be quite robust, with many factors included to approximate reality
• impose discipline/consistency on analysis
• complex and time consuming to formulate
• rarely forecast turning points well

Question 2

Decomposition of growth

Answer 2

Growth in labour inputs
* growth in potential labour force size
* growth in actual labour participation
Growth in labour productivity
* growth in total factor productivity
* growth from increasing capital inputs

Question 3

exogenous shocks

Answer 3

policy changes
new products/technology
geo politics
natural disasters
natural resources
financial crises

Question 4

Give two advantages and disadvantages of LEI approach

Answer 4

• primarly focus on forecasting turning points
• usually intuitive and simple in construction
• can give false signal
• history subject to frequent revision

Question 5

Give two advantages and disadvantages of checklist approach

Answer 5

• limited complexity
• flexible : structural changes can be incorporated anytime
• arbitrary, judgmental, subjective
• time consuming

Question 6

factors that raise inflation

Answer 6

rise in consumer confidence -> rise in consumer demand -> upward pressure on prices and inflation

decline in inventory/sales -> need to rebuild -> rise in demand for raw material -> upward pressure

positive output gap : upward pressure on prices/inflation

Question 7

Implication of negative rates in CME

Answer 7

difficult to justify negatives rates as a “risk free rate” to which premiums should be added to establish LT equilibrium asset class returns

historical data and quant models are unreliable

effects of other MoPo occuring simultaneoulsy can distort the relationship

Question 8

The Shape of the Yield Curve and the Business Cycle

Answer 8

Changes in the slope of the yield curve are driven primarily by the evolution of ST rate expectations (driven mainly by the business cycle and policies)

The slope of the curve may also be affected by debt management

Slope of YC = predictor of economic growth and where the economy is in BC

Question 9

Give 4 Economic Risks for FI in Emerging Markets

Answer 9

poor fiscal controls and monetary discipline
greater concentration of wealth and income; less diverse tax base
restriction on trade, capital flows and currency conversion
less educated and less skilles work foce

Question 10

Shrinkage estimator

Answer 10

Combining another estimate of the mean return with the sample mean

Question 11

data measurement errors

Answer 11

transcription error
survivior bias
appraisal data

Question 12

regime changes

Answer 12

change in technological
change in political
change in legal/regulatory

Question 13

Taylor Rule

Answer 13

r-target = r-neutral + inflation expec+0.5(GDPexpec-GDPtrend)+0.5(inflaexpec-inflatarget)

Question 14

Interest Rate/Exchange rate linkage

Answer 14

2 countries can share a yield curve if
1) capital flows are unrestricted
2) fixed rate is credibly fixed forever

Question 15

Grinold-Kroner

Answer 15

E(Re)=(D/P-change of S)+change of E+change of PE

Question 16

what appreciate a currency ?

Answer 16

lower inflation
rise in gov rate
higher GDP growth
enable FDI
current account surplus

Question 17

Give 1 advantage and 1 disadvantage of sample statistic

Answer 17

simple
with a small sample periods, cannot be used to estimate VCV-matrix for large numbers of assets

Question 18

Status quo

Answer 18

tendency for forecasts to perpetuate recent observations and for managers to then avoid making changes

Question 19

Data mining

Answer 19

Repeatedly searching a data set until a statistically significant pattern emerges.

Question 20

Risk of regime change

Answer 20

A change in regime is a shift in the technological, political, legal, economic, or regulatory environments. Regime change alters the risk–return relationship since the asset’s risk and return characteristics vary with economic and market environment

Question 21

Misinterpretation of correlation

Answer 21

correlation relationships should not be used in a predictive model without understanding the underlying linkages between the variables.

Question 22

risks faced by investors in emerging market equities over and above those that are faced by fixed income investors in such markets.

Answer 22

Weaker corporate governance : limited transparency, favors insiders
Weaker accounting standard
Weaker legal protection

Question 23

Prudence trap

Answer 23

The prudence trap is the tendency to be cautious when making decisions that could be potentially expensive or damaging to the decision maker’s career.