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LOS b: Discuss, in relation to capital markets expectations, the limitations of economic data; data measurement errors and biases; the limitations of historical estimates; ex post risk as a biased measure of ex ante risk; biases in analysts' methods; the failure to account for conditioning information; the misinterpretation of correlations; psychological traps; and model uncertainty. ffice ffice" />
Q1. The use of appraisal data, relative to actual returns, results in:
A) correlations that are biased downwards and standard deviations that are biased downwards.
B) correlations that are biased upwards and standard deviations that are biased upwards.
C) correlations that are biased upwards and standard deviations that are biased downwards.
Correct answer is A)
The use of appraisal data, relative to actual returns, results in correlations that are biased downwards and standard deviations that are biased downwards. The reason is that price fluctuations are masked by the use of appraised data.
Q2. A return index that tracks the NASDAQ stock market index can be subject to:
A) survivorship bias and hence downward biased returns.
B) survivorship bias and hence upward biased returns.
C) backfill bias and hence upward biased returns.
Correct answer is B)
Survivorship bias can result when a return series is based on a stock index. It will be biased upwards if the return calculation does not include firms that have been dropped from the index due to delistings.
Q3. An analyst is forecasting the return for real estate assets. She has one year of monthly returns and would like to have enough data points for statistical purposes. Which of the following would be the most likely to result from her desire to use statistics?
A) Asynchronous data and downward biased correlations with equities.
B) Asynchronous data and upward biased correlations with equities.
C) Synchronous data and downward biased correlations with equities.
Correct answer is A)
Her desire to use statistics would most likely result in asynchronous data and downward biased correlations. Some researchers use more frequent data (e.g., using daily instead of monthly returns) in order to increase the length of the data. This however, increases the likelihood of asynchronous data. Asynchronous data results when, for example, the return for a real estate asset is not available on a given day. The researcher then replaces it with the previous day’s return. When measured against equity returns with readily available daily data, the real estate asset standard deviation and correlation with equity is artificially low.
Q4. Greg Wright, CFA, and Phil Bishop, CFA, are analysts and market forecasters for Far Horizons Forecasting, Inc. or FHF. They use a variety of data in their analysis, and Wright and Bishop have found it cost effective to use publicly available data from the Bureau of Labor Statistics as well as market data such as the yields of fixed income instruments of various maturities.
Wright and Bishop have found inflation to be one of the most important inputs. They include the new announcement each quarter as it is released for the current quarter. Wright has insisted on using each new announcement for the current quarter. His goal is to avoid biases associated with placing too much weight on earlier information received and to allow their opinions to vary from previous opinions. However, Bishop has insisted that when inflation announcements deviate too far from the recent past, which in turn leads to a new capital market expectation very different from the recent observations, then they should revise the forecast to one closer to the recent average. A coworker, Cindy Post, CFA, recently cautioned Wright and Bishop concerning how inflation announcements must be used with caution. She says that the composition of the index, i.e., the items included in the index, can change over time. Daniel Paddington, CFA, also cautioned that the method of calculating the index can change over time, too. Post and Paddington caution that any forecasting model that does not account for these factors can lead to misleading results.
Post and Paddington have been offering advice concerning other matters. Post sees that Wright and Bishop have not been including beta analysis in their capital market expectations. Post says that beta research is appropriate for capital market expectations because this research relates to systematic risk, which affects the whole market. In forming capital market expectations, Paddington feels they should also begin using alpha research, which addresses the movement of prices of assets within classes.
The movements of short-term interest rates and bond yields as well as trends in the aggregate inventory-to-sales ratio are among the other inputs that Wright and Bishop already use in forming their capital market expectations. This is public data that Wright and Bishop find helpful in determining the present state of the economy. Currently they are observing that the rates on both Treasury bills and long-term Treasury bonds are increasing. Wright and Bishop also observe that the aggregate inventory-to-sales ratio is decreasing. Wright feels this is a good sign for business activity, but Bishop is pessimistic.
Wright and Bishop have recently tried to build models for forecasting exchange rates. They have considered the various approaches: purchasing power parity, relative economic strength, capital flows and savings-investment imbalances. They have decided to combine purchasing power parity and relative economic strength for a more complete theory.
Wright’s insistence that the newest inflation forecast be included in the model and Bishop’s insistence to adjust extreme forecasts are examples of:
A) attempting to avoid the anchoring trap but a possibility of falling into the status quo trap, respectively.
B) attempting to avoid both the anchoring trap and the status quo trap.
C) falling into the anchoring trap while attempting to avoid the status quo trap, respectively.
Correct answer is A)
Wright wants to avoid the anchoring trap, which occurs when an analyst places too much weight on earlier information and the associated expectation. Bishop wanting to not let forecasts deviate too far from the recent past is a good example of the status quo trap.
Q5. With respect to the cautionary notes concerning inflation announcements given by Post and Paddington:
A) Post is correct and Paddington is incorrect.
B) both are correct.
C) both are incorrect.
Correct answer is B)
Post is pointing out the practice known as rebasing, which is the changing of an index to make sure the index truly reflects the current situation. In the case of the Consumer Price Index, for example, the goods must change to reflect changing consumer buying habits. Inflation indexes also change the weights or calculation methods over time.
Q6. Based on Wright and Bishop’s observation concerning short-term and long-term rates, they should assess that the economy is in:
A) a late expansion.
B) a recession.
C) an early expansion.
Correct answer is A)
Both short-term and long-term rates increase in an expansion.
Q7. With respect to the advice that Post and Paddington offer concerning the use of beta research and alpha research, respectively, in the forming of capital market expectations:
A) Post is correct and Paddington is incorrect.
B) Post is incorrect and Paddington is correct.
C) both Post and Paddington are correct.
Correct answer is A)
The definitions are correct, and alpha research does focus on individual assets, but that is why Paddington is incorrect. Alpha is generally not included in models of capital market expectations.
Q8. There is a traditional interpretation to changes in the aggregate inventory-to-sales ratio. With respect to the mentioned trend in the aggregate inventory-to-sales ratio and the reaction by Wright and Bishop, we would most likely say:
A) both Wright and Bishop are using different versions of the traditional interpretation.
B) that Wright is using the traditional interpretation and Bishop is not.
C) that Bishop is using the traditional interpretation and Wright is not.
Correct answer is C)
The traditional interpretation is that a decreasing inventory-to-sales ratio is a negative sign because businesses are preparing for a decrease in business, and this is congruous with Bishop’s pessimism. Wright’s optimism is probably from a new view that firms have been able to lower their levels of inventory with the help of technology.
Q9. With respect to forecasting exchange rates, combining purchasing power parity (PPP) and relative economic strength for a more complete theory is:
A) not appropriate because both purchasing power parity and relative economic strength are long-term forecasting tools.
B) appropriate because purchasing power parity pertains to short-run announcements and relative economic strength adjusts to long-run equilibrium.
C) appropriate because purchasing power parity pertains to long-run equilibrium and relative economic strength adjusts to short-term announcements.
Correct answer is C)
It can be helpful to combine the PPP and relative strength approaches. The relative strength approach indicates the response to news on the economy but does not tell us anything about the level of exchange rates. The PPP approach indicates what level of the exchange rate can be regarded as a long-term equilibrium. By combining the two, we can generate a more complete theory.
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发表于 2009-5-1 08:34
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