3. Is Harold’s response to Huang’s question about current rates and inflation expectations most
likely correct?
A. No, it is incorrect with regard to future inflation expectations.
B. No, it is incorrect with regard to uncertainty of future inflation.
C. Yes.
The following information relates to questions 4 – 6.
Sabeen Shah is an equity analyst at Saddat and Shafi Securities (SSS), a global investment firm.
Shah prepares a newsletter for the clients, which includes responses to commonly asked
questions, a commentary on the economic factors impacting the global financial markets and
investment recommendations based on economic forecasts. In the upcoming newsletter, Shah
responds to questions about economic factors that are driving P/E multiples higher in USA. Shah
writes that decreasing volatility in USA's real GDP growth, a rise in inflation expectations, and
fall in equity risk premium are the possible contributors.
Shah also comments on the Russian economy which is showing signs of recovering from
recession. Shah makes the following recommendations for investors in the Russian markets: The
yield curve will steepen now therefore buy small-cap stocks versus large-cap stocks. In addition,
rotate from value stocks into growth stocks over the coming months.
Shah’s colleague, Rabia Brohi covers commercial real estate for SSS. Brohi explains her pricing
model for valuing commercial real estate investments to Shah so that it can be communicated to
SSS’s clients. Shah reviews Brohi’s model which consist of the following elements:
Expected cash flows from rents with the sale or redevelopment option as leases expire
A risk premium that is analogous to the equity risk premium
A risk premium to incorporate the credit risk of corporate bonds
An actively traded securities’ equity risk premium
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