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Sorry. I don’t mean to ask a dumb question here but triple confirming.

(Degree of Integration) X (ST Dev - i) X (correlation - i, m) X (Sharpe m) + (Degree of Segmentation) X (St Dev) X (Sharpe - m)

Then you add the illiquid Premium on top of ERPi?

Fully understand the second part of the response regarding inflation. Thanks for the help & confirmation

That would lead you to a wrong answer. Degree of integration is not part of the initial formula you specified but liquidity premium is. After you add those to each part of the formula, you multiply each result (integrated and segmentation) with degree of integration and add those two number to get equity risk premium. If the problem asks you to calculate total return, you increase ERP by Risk Free rate

Private Wealth: They give a description of tax regime in the country at the very beginning of the case (let’s say Heavy Dividend or something else) which implicitly gives you FLAT or PROGRESSIVE taxes. Later they can ask what is more efficient: tax exempt or tax defferred account. If regime is flat then there’s no difference.

did not notice this in any of the cfa am i did. where did you see this?

Thank you. I also reviewed the other thread on this topic. I did not pick this up in the Schweser Material for some reason. Very glad I asked the question.

Sorry. I don’t mean to ask a dumb question here but triple confirming.

(Degree of Integration) X (ST Dev - i) X (correlation - i, m) X (Sharpe m) + (Degree of Segmentation) X (St Dev) X (Sharpe - m)

Then you add the illiquid Premium on top of ERPi?

Fully understand the second part of the response regarding inflation. Thanks for the help & confirmation

That would lead you to a wrong answer. Degree of integration is not part of the initial formula you specified but liquidity premium is. After you add those to each part of the formula, you multiply each result (integrated and segmentation) with degree of integration and add those two number to get equity risk premium. If the problem asks you to calculate total return, you increase ERP by Risk Free rate

No Torsten, you get the same result either way because you’re multiplying Y*Premium + (1-Y)Premium, which gives you the premium.

You can include the liquidity premium in the original equations, or add them after weighting them by the degree of segmentation. You’ll get the same answer.

If that’s all she wrote, then I’d do forward earnings/current market price for the forward earnings yield and compare that to the 10 year bond yield (for the Fed model).

– if your position is “winning”, you bear credit risk;

–buyer of options bear credit risk

–be careful with “Long/Short” positions that you hold, that would change the whole thing. eg your trading desk SOLD 1000 calls, how do you delta-hedge ? Your “delta exposure” is Negative, so you want to Buy Underlying to hedge

–how to get out a swap early –> enter an opposite swap

Econ

– i think exam preppers and CFAI give mixed conclusions on how inflation impact each asset category. eg, i’ve seen “higher than expected inflation” –>good for Equity, bad for Bond –> but also seen bad for both equity&bonds. Hopefully someone can help, o.w. hope it’s not on the real thing.

Both Yardeni/Fed Model determine the Forward Earnings Yield. You compare Equity Yield to Treasury Yield for determining over-,under- or fairly- valued. I did however look for Yardeni, which compares its value to another Earnings yield, and found examples of both Forward and Actual Earnings yield. Can someone chime in on when to use which value?

Both Yardeni/Fed Model determine the Forward Earnings Yield. You compare Equity Yield to Treasury Yield for determining over-,under- or fairly- valued. I did however look for Yardeni, which compares its value to another Earnings yield, and found examples of both Forward and Actual Earnings yield. Can someone chime in on when to use which value?

Examples in the CFA books, or examples by a different test prep provider?

Found this in the errata: “Stocks exhibit modest positive correlation with inflation in the long run.”

I’m assuming long run inflation is the target inflation and whenever inflation is equal or below target, is a positive for equities, but less so for companies not able to pass on inflation to companies.

i believe that question stipulated specifically looking at the current earnings yield or perhaps it was over that past 12 months and thus actual was used.

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Yup

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That would lead you to a wrong answer. Degree of integration is not part of the initial formula you specified but liquidity premium is. After you add those to each part of the formula, you multiply each result (integrated and segmentation) with degree of integration and add those two number to get equity risk premium. If the problem asks you to calculate total return, you increase ERP by Risk Free rate

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I’m pretty sure I saw this in a Schweser mock

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Thank you. I also reviewed the other thread on this topic. I did not pick this up in the Schweser Material for some reason. Very glad I asked the question.

For others. The thread referenced is : https://www.analystforum.com/forums/cfa-forums/cfa-level-iii-forum/91372244

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No Torsten, you get the same result either way because you’re multiplying Y*Premium + (1-Y)Premium, which gives you the premium.

You can include the liquidity premium in the original equations, or add them after weighting them by the degree of segmentation. You’ll get the same answer.

what does justified forward earnings look like?

Let’s say they give you forward earnings and current market price.

how would you obtain justified forward earnings?

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If that’s all she wrote, then I’d do forward earnings/current market price for the forward earnings yield and compare that to the 10 year bond yield (for the Fed model).

Risk Mgmt

– if your position is “winning”, you bear credit risk;

–buyer of options bear credit risk

–be careful with “Long/Short” positions that you hold, that would change the whole thing. eg your trading desk SOLD 1000 calls, how do you delta-hedge ? Your “delta exposure” is Negative, so you want to Buy Underlying to hedge

–how to get out a swap early –> enter an opposite swap

Econ

– i think exam preppers and CFAI give mixed conclusions on how inflation impact each asset category. eg, i’ve seen “higher than expected inflation” –>good for Equity, bad for Bond –> but also seen bad for both equity&bonds. Hopefully someone can help, o.w. hope it’s not on the real thing.

Studying With

Both Yardeni/Fed Model determine the Forward Earnings Yield. You compare Equity Yield to Treasury Yield for determining over-,under- or fairly- valued. I did however look for Yardeni, which compares its value to another Earnings yield, and found examples of both Forward and Actual Earnings yield. Can someone chime in on when to use which value?

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Examples in the CFA books, or examples by a different test prep provider?

Vol 3 page 151 in the CFA books says FEY.

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Found this in the errata: “Stocks exhibit modest positive correlation with inflation in the long run.”

I’m assuming long run inflation is the target inflation and whenever inflation is equal or below target, is a positive for equities, but less so for companies not able to pass on inflation to companies.

Studying With

Positive butterfly: short and long rates go up; mid rates come down (a smile, less convex curvature)

negative butterfly: short and long rates go down, mid rates go up (a frown, more convex curvature)

Barbell benefits from - butterfly, + twist, - shift

-to compute for implementation shortfall

in bps-computing the effective interest of a floating rate note

It was a long shot, glad i made it.

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For evaluating δ hedging in options, setting benchmark for next day with continuous compounded rate, make sure to use decimal instead:

assume rc = 4%

hence benchmark = value of port e^(0.04/365) —not 4/365

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^ what in seven hells?

i believe that question stipulated specifically looking at the current earnings yield or perhaps it was over that past 12 months and thus actual was used.

CA, CFA, FRM