Xavier Fellows works in the research department of Multinational Inc., a large investment bank. He is tasked with forecasting economic conditions to support the bank's money managers and traders. Fellows takes his work seriously and is considered to be an excellent forecaster. His economic forecasts are updated monthly and sent to most of Multinationals analysts and money managers. The analysts use Fellows' forecasts as the basis for their own research on specific securities or asset classes. However, Fellows is concerned that his forecasts are not accurate enough. In an effort to avoid making mistakes, Fellows follows a detailed process to develop accurate and usable forecasts. Here is his system: - Establish a benchmark for market expectations. Multinational serves thousands of clients with different investment goals and constraints, and Fellows knows analysts will need the different benchmarks for a variety of different types of investors.
- Look at the historical returns of a number of asset classes to act as a check on forecasts for each asset class.
- Assemble data on historical returns and valuations for all relevant asset classes, considering potential biases, adjusting the numbers to account for different calculation methods, and ensure that data definitions match those used by the company that collected the data.
- Interpret the data. Fellows uses his years of experience to extrapolate that data into growth and valuation assumptions for each asset class. This step is the most subjective.
- Distill assumptions into top-down forecasts, detailing the assumptions and methods for interpreting historical data in the event that individual analysts want to use data to create their own industry-specific forecasts.
- Monitor performance. If Fellows forecasts prove to be inaccurate, he works to improve his models.
This month's forecast dwells heavily on inflation projections and their expected effect on the returns of different asset classes. Fellows projects a decline in inflation. Stock analyst Karen Andrews calls Fellows after the report is released with some questions about his analysis. She is pleased with the work, but a bit disappointed that he did not include information on current and estimated bond yields. Andrews asks Fellows to forward his analysis of the inflation picture to Carol Huggins, a colleague who works in the bank's money-management business. Huggins consults on money-management issues with large clients and is very interested in inflation projections. Quentin Zart, an entry-level analyst e-mails Fellows requesting advice on some international economic indicators to assist him in his analysis. Zart is looking for leading indicators that can help him spot trends in major markets in Europe and Asia. Fellows responds to Zart promptly and suggests he check out the German Consumer Price Index, Japan's Industrial Production report, the France Monthly Business Survey, and the Global Manufacturing Purchasing Managers Index. Lester Canfield, who manages money on a discretionary basis for high-net-worth individual investors, is also interested in Fellows' forecast. After reading the entire document, he decides to sell some of his clients' interest in a limited partnership that develops and manages real estate, and invest that money in high-yield bonds. Canfield's reasoning is threefold: - Canfield believes the partnership has excellent return potential, but he is the only one who expects such robust results. The bonds seem to be a safer investment, and Canfield does not want to guess wrong.
- Historically, average high-yield bond returns are higher than the returns of real estate partnerships.
- During periods of falling inflation, real estate investments often lag the market.
Before making the move, Canfield calls Fellows to get an opinion on his plan. After hearing Canfield's rationale, Fellows advises against the move into high yield bonds. Fellows' next job is to prepare a forecast on currency, projecting how the dollar is likely to perform relative to various foreign currencies. To prepare this forecast, he prints out in-house analysis of several economic indicators, including reports on unemployment claims, retail sales, durable-goods orders, and the index of leading economic indicators. Fellows skipped a step in his technique for producing forecasts. He forgot to: | A) | assure that the underlying data is accurate. |
| | B) | identify where he obtained his data. |
| | C) | adjust his forecasts for different industry groups. |
| D) | identify a valuation model used in his analysis. |
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Answer and Explanation
Fellows' plan mirrors the seven-step process for formulating capital-market expectations in every aspect except one, identifying the valuation model used in the analysis. Assuring the accuracy of data and identifying its source are important, but they would presumably fall under steps three and five of Fellows' process. Adjusting the forecast for different industry groups is the job of the analysts.
Fellows' advice to Canfield suggests he believes Canfield failed to consider all of the following EXCEPT: A) | the recallability trap. |
| | B) | conditioning information. |
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Answer and Explanation
The relationship between historical returns and economic variables is not constant over time, and Canfield may not be considering information about changing economic conditions that affected real-estate returns over short periods of time. Analysts fall into the prudence trap when they become overly conservative because they are afraid of being wrong. The use of ex post (after the fact) data to interpret ex ante (before the fact) actions is risky. There may be other factors, whether correlated with inflation or independent, that caused subpar real estate returns. The recallability trap has to do with allowing dramatic events to affect forecasts. This issue is not relevant here.
Andrews most likely requested bond yields because she wanted to: | A) | gauge potential fixed-income investments. |
| B) | analyze stock-market valuations using the risk premium approach. |
| | | D) | develop a shrinkage estimate. |
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Answer and Explanation
The risk premium approach uses bond yields and an equity risk premium to project market returns. Since Andrews is an equity trader, it is unlikely she is interested in fixed-income investments. The calculation of beta does not involve bond yields, and the question of shrinkage estimators is not relevant here.
Which of the following economic indicators is of the least value in projecting currency fluctuations? | | | | D) | Index of leading economic indicators. |
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Answer and Explanation
Higher unemployment often leads to lower interest rates, which can discourage foreign investors from buying dollar-denominated assets. In most cases, high durable-goods orders and a high LEI index will have a positive effect on currency. As such, all three of the above indicators are of some value in projecting currency movements. In contrast, retail sales data sends a mixed message. Strong sales can push up interest rates, which is good news for the dollar. But high levels of retail activity can boost spending on imports, which tends to lead to a weaker dollar.
Huggins is least likely to consult for: | | B) | a firm that administers pension plans. |
| | C) | a private university with a large endowment. |
| D) | a life-insurance company. |
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Answer and Explanation
Andrews wanted Huggins to receive a forecast regarding inflation, and Huggins' interest in inflation forecasts can lead us to conclude that Huggins consults for clients who face inflation risk. Individual investors and endowments face a lot of inflation risk. While defined-contribution pension plans are unlikely to be concerned about inflation, defined-benefit plans are. There is a good chance that a pension-plan administrator will deal with both types of pensions. Life-insurance companies face little inflation risk. If Huggins consults on money management with a life-insurance company, she probably has little concern about inflation.
Which of the economic indicators Fellows suggested will be of the least value to Zart? | A) | Japan Industrial Production. |
| | B) | France Monthly Business Survey. |
| | C) | Global Manufacturing Purchasing Managers Index. |
| D) | German Consumer Price Index. |
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Answer and Explanation
Zart specifically requested leading indicators which all of the indicators mentioned with the exception of the German Consumer Price Index are leading indicators. | 
发表于 2008-9-12 14:33
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