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Reading 48: Dreaming With BRICs: The Path to 2050-LOS d

CFA Institute Area 3-5, 7, 12, 14-18: Portfolio Management
Session 17: Portfolio Management in a Global Context
Reading 48: Dreaming With BRICs: The Path to 2050
LOS d: Discuss the conditions necessary for sustained economic growth, including the core factors of macro-economic stability, institutional efficiency, open trade, and worker education.

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Doyle and Rodriguez then provide the employees a discussion regarding the correct method of valuing a market. They use the following data for an aggregate stock market in order to estimate the return on a stock market using the earnings multiplier approach.

Current index price

$

80.00

Equity Risk Premium

9.0%

Estimated dividend next period

$

1.20

Estimated earnings next period

$

8.00

Financial Leverage

0.80

Government bond rate

6.8%

Net Profit Margin

12.0%

Total Asset Turnover

1.80

The next day, talking amongst themselves, Doyle and Rodriguez discuss the currency risk in more detail. Doyle states that, in developed country stock markets, the currency value and the stock value often fall together because, when investors lose confidence in the currency, they also typically lose confidence in the stock market. Rodriguez states that if an investor wishes to add a manager with expertise in currencies to his or her existing investment policy, then the investor would use a balanced mandate approach.

With respect to the statements regarding the per capita income and inflation in BRIC countries:

A)Doyle is correct; Rodriguez is incorrect.
B)
Doyle is incorrect; Rodriguez is incorrect.
C)Doyle is incorrect; Rodriguez is correct.
D)Doyle is correct; Rodriguez is correct.


Answer and Explanation

Doyle is incorrect. Although she is correct that forecasted growth for the BRIC countries is quite impressive especially when there are stable economic environments, she is incorrect in her statement regarding per capita income. By 2050, the per capita income in the majority of BRIC countries (except in Russia) is projected to be below that in G6 countries.

Rodriguez is incorrect. The ability to sustain growth in a country is influenced by its macroeconomic stability which is characterized by stable inflation, responsible fiscal policies, stable currency values, and accommodating governmental policies. High inflation hampers growth because it discourages investment in the economy by households and businesses. As such, governmental fiscal and monetary policies should focus on controlling inflation.

Doyle is incorrect. Although she is correct that forecasted growth for the BRIC countries is quite impressive especially when there are stable economic environments, she is incorrect in her statement regarding per capita income. By 2050, the per capita income in the majority of BRIC countries (except in Russia) is projected to be below that in G6 countries.

Rodriguez is incorrect. The ability to sustain growth in a country is influenced by its macroeconomic stability which is characterized by stable inflation, responsible fiscal policies, stable currency values, and accommodating governmental policies. High inflation hampers growth because it discourages investment in the economy by households and businesses. As such, governmental fiscal and monetary policies should focus on controlling inflation.

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Which of the following BRIC countries has had the most trouble with inefficient institutions?

A)China.
B)India.
C)Brazil.
D)
Russia.


Answer and Explanation

If the institutions in an economy operate efficiently, an economy can produce goods and services more efficiently. Inefficient institutions are often symptomatic of other chronic problems. BRICs have had trouble in this area, particularly in the case of Russia.

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Which of the following BRIC countries has been the slowest to open their economy?

A)
India.
B)China.
C)Russia.
D)Brazil.


Answer and Explanation

An open economy is one in which trade and capital flows freely across its borders. With an open economy, an economy gains increased access to technology, inputs, and markets. Research has verified that openness in an economy results in higher growth. Some BRICs have had more success at opening up their economy; India has been particularly slow to do so.

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Which of the following BRIC countries has the weakest educational system?

A)China.
B)Russia.
C)
India.
D)Brazil.


Answer and Explanation

Research has demonstrated that higher levels of education are associated with increased economic growth in a country. Although some BRIC countries have made some progress in this area, the primary and secondary education systems in India are relatively poor.

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thanks.

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