QUESTIONS 13-18 RELATE TO CAPITAL MARKET EXPECTATIONS AND EQUITY PORTF...

Question

1.10 ×  Taiwan  ?  450  4.5%  2.7% Singapore's E(Risk premium) The next speaker, Clive Smyth, is a member of the exchange rate committee at the Bank of New Zealand. His presentation concerns the links between spot currency rates and forecasted exchange rates. He states that foreign exchange rates are linked by several forces including purchasing power parity (PPP) and interest rate parity (IRP). He tells his audience that the relationship between exchange rates and PPP is strongest in the short run, while the relationship between exchange rates and IRP is strongest in the long run. Smyth goes on to say that when a country's economy becomes more integrated with the larger world economy, this can have a profound impact on the cost of capital and asset valuations in that country. The final speaker in the session directed his discussion toward emerging market investments. This discussion, by Hector Ruiz, head of emerging market investment for the Chilean Investment Board, was primarily concerned with how emerging market risk differs from that in developed markets and how to evaluate the potential of emerging market investments. He noted that sometimes an economic crisis in one country can spread to other countries in the area, and that asset returns often exhibit a greater degree of non-normality than in developed markets. Ruiz then discusses economic forecasting approaches to developed markets. He makes several statements. The econometrics model approach offers the advantage of consistent Statement 1: application of relationships throughout all variables, but it is time consuming to initially construct.      Statement 2:  In contrast, the economic indicators approach is conceptually easier to understand, but it takes a great deal of time for the user to collect the data. Ruiz concluded his presentation with the data in the tables below to illustrate factors that should be considered during the decision-making process for portfolio managers who are evaluating investments in emerging markets. Characteristics for Russia and Brazil Characteristic  Brazil  Russia Foreign exchange to short-term debt  93%  182% Debt as a percentage of GDP  86%  38% Characteristics for China and India Characteristic  China  India Population growth  0.8%  1.3% Labor force participation growth  1.8%  0.5% Growth on spending on new capital inputs  1.3%  1.4% Growth in total factor productivity  0.9%  0.4% Expected savings relative to investment  Surplus  Deficit ... When the first presenter refers to skewed estimates and time period selection, she is referring to: A)  emotional bias and status quo. B)  emotional bias and data mining. C)  cognitive errors and status quo bias. Question #14 of 60 Based upon the information provided by So, the equity risk premium in Singapore and the intrinsic value of the Taiwan index are closest to: Singapore E(risk premium)  Taiwan Index Value A)    6.0%  9,800 B)    6.1%  9,500  C)    8.4%  7,125 Question #15 of 60 Regarding Smyth's statements concerning exchange rate links: A)  both statements are incorrect. B)  only the statement regarding PPP is correct. C)  only the statement regarding IRP is correct. Question #16 of 60 Regarding Ruiz's two statements about economic forecasting for developed markets: A)  only statement 1 is true. B)  only statement 2 is true. C)  both statements 1 and 2 are true. Question #17 of 60 With regard to Ruiz's statements concerning emerging market risk, when an economic crisis spreads from one country to other countries in the area, this is known as: A)  contagion, and non-normality of returns precludes the use of non-parametric models to estimate risk. B)  contagion, and non-normality of returns makes it more difficult to estimate risk using parametric models. C)  macro transmission, and non-normality of returns makes it more difficult to estimate risk using parametric models. Question #18 of 60 Based upon the data provided, which of the following statements is most correct? A)  Brazil would be favored for equity investment. B)  China would be favored for both equity and bond investment. C)  Russia would be favored for bond investment. Question #19 of 60

Answer

1.10 ×  Taiwan  ?  450  4.5%  2.7% Singapore's E(Risk premium) The next speaker, Clive Smyth, is a member of the exchange rate committee at the Bank of New Zealand. His presentation concerns the links between spot currency rates and forecasted exchange rates. He states that foreign exchange rates are linked by several forces including purchasing power parity (PPP) and interest rate parity (IRP). He tells his audience that the relationship between exchange rates and PPP is strongest in the short run, while the relationship between exchange rates and IRP is strongest in the long run. Smyth goes on to say that when a country's economy becomes more integrated with the larger world economy, this can have a profound impact on the cost of capital and asset valuations in that country. The final speaker in the session directed his discussion toward emerging market investments. This discussion, by Hector Ruiz, head of emerging market investment for the Chilean Investment Board, was primarily concerned with how emerging market risk differs from that in developed markets and how to evaluate the potential of emerging market investments. He noted that sometimes an economic crisis in one country can spread to other countries in the area, and that asset returns often exhibit a greater degree of non-normality than in developed markets. Ruiz then discusses economic forecasting approaches to developed markets. He makes several statements. The econometrics model approach offers the advantage of consistent Statement 1: application of relationships throughout all variables, but it is time consuming to initially construct.      Statement 2:  In contrast, the economic indicators approach is conceptually easier to understand, but it takes a great deal of time for the user to collect the data. Ruiz concluded his presentation with the data in the tables below to illustrate factors that should be considered during the decision-making process for portfolio managers who are evaluating investments in emerging markets. Characteristics for Russia and Brazil Characteristic  Brazil  Russia Foreign exchange to short-term debt  93%  182% Debt as a percentage of GDP  86%  38% Characteristics for China and India Characteristic  China  India Population growth  0.8%  1.3% Labor force participation growth  1.8%  0.5% Growth on spending on new capital inputs  1.3%  1.4% Growth in total factor productivity  0.9%  0.4% Expected savings relative to investment  Surplus  Deficit ... When the first presenter refers to skewed estimates and time period selection, she is referring to: A)  emotional bias and status quo. B)  emotional bias and data mining. C)  cognitive errors and status quo bias. Question #14 of 60 Based upon the information provided by So, the equity risk premium in Singapore and the intrinsic value of the Taiwan index are closest to: Singapore E(risk premium)  Taiwan Index Value A)    6.0%  9,800 B)    6.1%  9,500  C)    8.4%  7,125 Question #15 of 60 Regarding Smyth's statements concerning exchange rate links: A)  both statements are incorrect. B)  only the statement regarding PPP is correct. C)  only the statement regarding IRP is correct. Question #16 of 60 Regarding Ruiz's two statements about economic forecasting for developed markets: A)  only statement 1 is true. B)  only statement 2 is true. C)  both statements 1 and 2 are true. Question #17 of 60 With regard to Ruiz's statements concerning emerging market risk, when an economic crisis spreads from one country to other countries in the area, this is known as: A)  contagion, and non-normality of returns precludes the use of non-parametric models to estimate risk. B)  contagion, and non-normality of returns makes it more difficult to estimate risk using parametric models. C)  macro transmission, and non-normality of returns makes it more difficult to estimate risk using parametric models. Question #18 of 60 Based upon the data provided, which of the following statements is most correct? A)  Brazil would be favored for equity investment. B)  China would be favored for both equity and bond investment. C)  Russia would be favored for bond investment. Question #19 of 60