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    CFA L3 - Memorize

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    adham.abdelaty
    The document discusses various economic concepts including monetary and fiscal policy, cash, bonds, net exports, term premium, credit premium, real estate, currency, volatility estimation, and the Black-Litterman framework. It also mentions Taylor's rule, foreign exchange, derivatives, and high-frequency data.

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    CFA L3 - Memorize

    Uploaded by

    adham.abdelaty
    44 views2 pages
    The document discusses various economic concepts including monetary and fiscal policy, cash, bonds, net exports, term premium, credit premium, real estate, currency, volatility estimation, and the Black-Litterman framework. It also mentions Taylor's rule, foreign exchange, derivatives, and high-frequency data.

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    CFA Notes Level 3

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    The document discusses various economic concepts including monetary and fiscal policy, cash, bonds, net exports, term premium, credit premium, real estate, currency, volatility estimation, and the Black-Litterman framework. It also mentions Taylor's rule, foreign exchange, derivatives, and high-frequency data.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    44 views2 pages

    CFA L3 - Memorize

    Uploaded by

    adham.abdelaty
    The document discusses various economic concepts including monetary and fiscal policy, cash, bonds, net exports, term premium, credit premium, real estate, currency, volatility estimation, and the Black-Litterman framework. It also mentions Taylor's rule, foreign exchange, derivatives, and high-frequency data.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 2

    Economics

    - Rest Mon, Stim Fisc  Flat


    - Stim Mon, Rest Fisc  Steep
    o Cash
     It is a floating rate instrument with zero duration
     It earns the real rate of interest when inflation is within expectation
     A greater than expected inflation  Cash yields Less
     A less than expected inflation  Cash yields More
     Inverse Relationship between differential of expected inflation and cash yield
    o Bonds (Nominal Fixed-Rate Bonds)
     Bond prices and interest rates have an inverse relationship
     Short term bond yields are more volatile than long term yields when inflation is within expectations
     Higher/lower than expected inflation, makes the long-term bonds yields more volatile
     Long term different from expected  Volatility Higher

    o Net Exports = Net Private Saving + Government Surplus


    o Term Premium and its relation to Recession Hedge
     If inflation is a result of aggregate demand
     Leads to low term premiums
     Nominal bonds returns and growth are negatively correlated
     Demand Negative Term Premium Low
     If inflation is caused by aggregate supply
     Leads to higher term premium
     Nominal bond returns and growth are positively correlated
     Supply Positive Term Premium High

    o Credit Premium is positively related to the following:


     Slope of the Yield Curve
     Volatility of the Equity Markets

    o Real Estate
     Expected Return = Cap Rate + NOI Growth Rate
     For Finite Periods  Expected Return = Cap Rate + Change in Cap Rate + NOI Growth Rate
     Cap Rate is used as the discount rate for valuing real estate property over the long term
     Cap rates are positively linked to long-term interest rates
     They do rise in an expanding economy and fall in a recessionary economy

    o Currency
     Expected change in exchange rate should be in line with expected inflation rate differentials
     Under the UIRP (Uncovered Interest Rate Parity), all premiums are useless

    o In Volatility Estimation
     ARCH Models: Used to address volatility clustering
    o We can use Black-Litterman Framework to combine all models
    During the slowdown or business cycle or the late upswing  Yield Curve is Flat or Inverted and is
    expected to steepen in the near term
    o High-frequency data are more sensitive to asynchronism
    o High-frequency data produce more precise variances and co-variances (and less precise means)

    Expected equity risk premium (Expected Risk Premium) = Expected equity return − Current 10-year government
    bond yield
    - Taylor’s Rule (Forecast Minus Trend)

    - FX  NO Interim Interest Payments

    Derivatives

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