I understand that em debt will exhibit negative skew so risk 1 is wrong, however I also believe risk 3 is wrong. It seems to contradict volume 4 reading 25 page 146, that em debt now has frequency of default similar to developed market corporate debt of the same ratings. Am I missing something or are there two answers to the question?
I know this is an old post, but it seems that this is the same question as Q41, Mock 2015 (Berg case), and I have the same question regarding Risk 3…
I dont know which mock you are referring to?!
I would say that EM has still more defaults than DM even if we observe a convergence. I am sure the question is formulated as “what is the best…” so the other answers might not be wrong but not as true as the correct answer.
Hope that helps and let me know which mock is that so I can look deeper
It is CFA Mock 2015 (item set questions, morning version, found on institute website)
Risk 3:" the frequency of default and ratings transitions is significantly higher than it is in developed market corporate bonds with similar ratings". And they consider this is true, because the question is with "least likely, and this is not the answer.
In the book, vol 4, fixed income part II, summary, they mention “the spread of emd over risk free rate has narrowed considerably as the quality of sovereign bonds has increased to the point that they now have similar frequencies of default, recovery rates, and ratings transition probabilities compared with corporate bonds with similar ratings”
It is true that in the book they only mention “corporate bonds” and not “developed markets corporate debt”…