Economics and Investment Markets

Question 1

A closet index fund

Answer 1

A fund that advertises itself as being actively managed but is actually close to being an index fund

Question 2

Inter-temporal rate of substitution

Answer 2

The ratio of the marginal utility of consumption s periods in the future to the marginal utility of consumption today

Question 3

P_t,s

Answer 3

• The price today, t, of a default-free bond paying 1 monetary unit of income s periods in the future

Question 4

The price uncertainty of a two-period bond at t = 1 gives rise to a risk premium, even if the bond is risk-free

Answer 4

Question 5

Answer 5

Question 6

Taylor’s rule

• pr_t - the policy rate at time t
• l_t - the level of real short-term interest rates that balance long-term savings and borrowing in the economy
• ι_{t -} the rate of inflation, ι^∗_t is the target rate of inflation
• Y_t and Y^∗_t are, respectively, the logarithmic levels of actual and potential real GDP

Answer 6

Question 7

Gilt

Answer 7

Bonds that are issued by the British government and generally considered low risk. Gilts are the U.K. equivalent to U.S. Treasury securities

Question 8

Break-even inflation (BEI)

Answer 8

The difference between the yield on a zero-coupon default-free nominal bond and on a zero-coupon default-free real bond of the same maturity is known as the break-even inflation

Question 9

• First oil shock
• Second oil shock

Answer 9

• 1973
• 1979

Question 10

• US government STRIPS (Separate Trading of Registered Interest and Principal Securities)
• US government TIPS (US Treasury Inflation-Protected Securities)

Answer 10

• Zero-coupon default-free nominal bond
• Zero-coupon default-free real bond

Question 11

Value vs growth stocks performance

Answer 11

Value stocks tend to outperform growth stocks in the aftermath of a recession, and growth stocks tend to outperform value stocks in times when the economy is expanding

Question 12

Consumer staples (non-cyclical)

Answer 12

Essential products such as food, beverages, tobacco and household items. Consumer staples are goods that people are unable or unwilling to cut out of their budgets regardless of their financial situation. Consumer staples stocks are considered non-cyclical, meaning that they are always in demand, no matter how well the economy is performing. Also, people tend to demand consumer staples at a relatively constant level, regardless of their price

Question 13

Consumer discretionary (cyclical)

Answer 13

A sector of the economy that consists of businesses that sell nonessential goods and services. Companies in this sector include retailers, media companies, consumer services companies, consumer durables and apparel companies, and automobiles and components companies

Question 14

• Sell-side analysts
• Buy-side analysts

Answer 14

• Analysts employed by brokerages
• Analysts employed by an investment manager or institutional investor

Question 15

l_t,s

Answer 15

Yield to maturity on a real default-free investment today (t), which pays one unit of currency s periods in the future

Question 16

l_t,s for an investment horizon of 1 year and a payoff of 1$

Answer 16