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Study Session 7: Applications of Economic Analysis to Portfolio Management

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 ?

Leading indicator based approach

One weakness of Leading Indicator-Based Approach is 

“Historically, has not consistently worked, as relationships between inputs are not static.”

Can I have an example of inputs showing non-static relationship?

Thank you!

savings-investment approach to FX forecasting

there are four approaches to forecasting exchange rate(FX) movement. under the last one, savings-investment approach, textbook mentioned domestic savings and investment is low relative to spending on a whole, hence incurring dual deficits and borrowing from foreign investors, a huge current account deficit. 

this arise from higher interest rate, or higher attractive investment returns, and hence FX is expected to rise? 

Can anyone explain this why the currency with a CA-deficit is expected to rise?

Interest rate effects on real estate

since lower interest is net positive for real estate valuation, as mentioned in the textbook under CME, why inflation above expectation (higher interest rate) is positive effect for real estate?

Capital Market Expectations (Doubt)


‘I cant understand how did they calculate the 1 year trend in consumer spending and inflation to be 4% and 10% respectively?

Please help me with the question (I have posted the question as well as the solution below)

Question 11 Pg 122 Reading 16

Plim Ltd. is a manufacturing company in Finland that is a defined-benefit pension plan sponsor. Plim intends to increase its overall plan diversification by making an investment in Country X. The table below provides data for Country X indexes representing various economic variables.