1/ How do you call a psychological trap when someone wants to take excessive risk in recent investment to make up for historical loss? 2/ In determining yield advantage, do we have to incorporate currency effect. In question 15.3 - afternoon test 2 - Vol 2 - Schweser they don’t while they do in question 9D in morning test 3 - Vol 1 - Schweser. 3/ What do you think about the pass rate this year? Anyone?
- Loss aversion 2. Yield advantage should be difference between rate on bond and that country’s risk free rate, haven’t seen it presented differently. 3. 90%
Question 2: What you indicate is excess return above risk free rate. You use excess return to compare 2 bonds when currency risk is fully hedged. What I indicate here is break even yield analysis. You subtract yield between 2 bonds to compute yield advantage and divide for duration of one bond (which is higher). However, in question 9D they incorporate currency effect here. Question 9D- schweser - morning test 3 rx = 4.55% => yield for bond X cx = 3.05% => cash rate for currency X ry = 7.05% => yield for bond Y cy = 5.65% => cash rate for currency y Yield advantage of bond X is [(4.55%-7.05%)+(5.65%-3.05%)]=0.1% incorporating currency effect. Question 15.3 - schweser - afternoon test 2 yield on Nakhon Metal bond (denominated in Baht) = 5.2% cash rate in Baht = 2.5% yield on Powhatan bond (denominated in US dollar) = 4.5% cash rate in US = 6.5% When performing break even yield analysis, they don’t account for currency effect Yield advantage of Nakhon Metal bond = (5.2% - 4.5%). Could you explain that?
Pls note that it’s Schweser 2011 quiz