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Study Session 7: Applications of Economic Analysis to Portfolio Management

Segmented Sharpe ratio

Example on page 237 gives segmented sharpe ratio and global Sharpe ratio.  They use segmented Sharpe ratio when solving for segmented risk premium and global sharpe ratio when solving for intergrated risk premium.  Last year we used Global Sharpe ratio when solving for both integrated and segmented risk premium. 

Does this mean past essay exams on Singer are no good because they don’t give segmented sharpe ratio?  

And is equation 5 written wrong on page 236?

Thank you.

Economics - reading 11

On page 223, they talk about the ability to hedge recession risk and how its one of the drivers of term premiums.

They say a low term premium warranted if aggregate demand drives inflation and growth.  The nominal bonds tend to be negatively correlated with growth in these cases.

What this have to do with ability to hedge recession risk?  Maybe tired but don’t see connection.

Economics - Reading 10 - BB 11

Any help, thank you.  I cant remember current account and capital account stuff that well. We’re given in text:

(X - M) = (S - I) + (T - G).

BB 11 asks what impact of a tax cut on capital and current account balances?

For current account they say a larger deficit due to larger government deficit (T - G smaller) and tax cut will lead to larger domestic investments (S - I smaller).  

For capital accounts they say larger surplus due to selling assets abroad (X - M larger).  

Economics - BB5 - Page 185

They have equation listed on page 184 but don’t understand fully how relate to BB5.

They say 12.18% in BB5 is return and made up of (3.14 + 4.12 + 0 + .95 + 3.97)

Where is this (equation) coming from?  It’s not the equation on page 184.  It kind of looks like the Grinold equation from last year but the text hasn’t taught this up to this point yet.  Can explain somebody?

I can’t complete part 2 of BB5 either because it’s related to this.

Thanks somebody.

Contingent convertible bond

can someone explain why contingent convertible bonds in example 1, page 49 is type IV liability. I understand the timing is uncertain but there is no cash outlay during the conversion. so then how is it type 4? 

Business cycle and asset returns

In reading 16, there is the section about “Business cycle and asset returns”. This is perfect to put in a small text and ask to justify which part of the cycle you are in. Any hints to remember all these points?

Reading 16 EOC 19

If FAP appreciates by 10% shouldn’t it be 3/1.10 = 2.727? 

Or 1/3*1.10 =0.366 and the 1/0.3666 = 2.727 ?

instead of 2.70 as per answer? 


Grinold-Kroner Model

Just want to confirm, because I feel like I’m taking crazy pills…

The Grinold-Kroner model is a model to calculate/determine expected return correct? In the material and on some questions, ‘risk premium’ is used interchangeably with expected return and I just want to make sure that the equation is for E(R) and not ERP like the first step in Singer-Terhaar. 

I’m not trying to mess up a simple equation because I didn’t add/subtract the risk-free rate here…Thanks.

Capital Market Expectations

Why it is not a good idea to invest in bonds during early upswing, even when the bond yield are rising ?