2.
Exhibit 2: Current and Expected Market Statistics, US Large-Cap Equities
Expected dividend yield 2.10% Expected inflation rate 2.30%
Expected repurchase yield 1.00% Current P/E 15.6
Expected real earnings growth 2.60% Expected P/E 10 years prior 15
The analysts think that adding to US Treasuries would fit portfolio objectives, but they are
concerned that the US Federal Reserve Board is likely to raise the fed funds rate soon. They
assemble the data in Exhibit 3 in order to use the Taylor rule (giving equal weights to inflation
and output gaps) to help predict the Fed’s next move with respect to interest rates.
Exhibit 3: Current Data and Forecasts from the Fed
Statistic Status Value (%)
Fed funds rate Current 3
Neutral 2.5
GDP growth rate Trend 4.5
Forecast 3
Target 2.5
Inflation
Forecast 3.2
To assess the attractiveness of emerging market equities, Fiske suggests that they use the data
in Exhibit 4 and determine the expected return of small-cap emerging market equities using the
Singer–Terhaar approach.
Exhibit 4: Data for Analyzing Emerging Markets
Correlation Degree of
Asset Class Standard
Deviation
Integration with GIM
with GIM
Emerging small-cap equity 23% 0.85 65%
Global investable market (GIM) 7.00%
Additional information
Risk-free rate: 2.5% Illiquidity premium: 60 bps
Sharpe ratio for GIM and emerging small-cap equity: 0.31
Finally, after examining data pertaining to the European equity markets, the investment team
believes that there are attractive investment opportunities in selected countries. Specifically,
they compare the recent economic data with long-term average trends in three different
countries, shown in Exhibit 5.
Exhibit 5: Relationship of Current Economic Data to Historical Trends: Selected European Countries
Ireland Spain Hungary
Production Above trend, declining Well above trend Below trend, rising
Inflation Above trend, declining Average, rising Below trend, stable
Capacity utilization Above trend Average, rising Below trend
Confidence Average, declining Well above trend Below trend, rising
Fiscal/monetary policies Cautionary Restrictive Stimulatory
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