CURRENT AND EXPECTED MARKET STATISTICS, US LARGE-CAP EQUITIES EXPECTED DIVIDEND YIELD 2

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