12 points on inter market carry trade ? Come on the world ain’t that bad.
Point 3 : Singer-Terhaar includes illiquidity premium when calculating ERP for Emerging/Developing country.
Hey, we’re allowed to use pens right? Stupid question.
That’s what I meant. Not using the forward yield is the mistake.
haha okay. I read that the opposite way.
I just confirmed with the text, it is FEY for both Fed and Yardeni. Vol 3 Pg 151
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?
Maybe it’s just me but picking the right number of forward points when calculating the forward rate has thrown me a few times
Forward Earnings Yield. IE E1 / P0.
E1 on the formula sheet represents its the forward earning yield. Correct?
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
Yup
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
I’m pretty sure I saw this in a Schweser mock
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
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?
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.
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?