Reading 15 Capital Market Expectations

a discuss the role of, and a framework for, capital market expectations in the portfolio management process;

b discuss challenges in developing capital market forecasts;

c demonstrate the application of formal tools for setting capital market expectations, including statistical tools, discounted cash flow models, the risk premium approach, and financial equilibrium models;

d explain the use of survey and panel methods and judgment in setting capital market expectations;

e discuss the inventory and business cycles, the impact of consumer and business spending, and monetary and fiscal policy on the business cycle;

f discuss the impact that the phases of the business cycle have on short-term/long-term capital market returns;

g explain the relationship of inflation to the business cycle and the implications of inflation for cash, bonds, equity, and real estate returns;

h demonstrate the use of the Taylor rule to predict central bank behavior;

i evaluate 1) the shape of the yield curve as an economic predictor and 2) the relationship between the yield curve and fiscal and monetary policy;

j identify and interpret the components of economic growth trends and demonstrate the application of economic growth trend analysis to the formulation of capital market expectations;

k explain how exogenous shocks may affect economic growth trends;

l identify and interpret macroeconomic, interest rate, and exchange rate linkages between economies;

m discuss the risks faced by investors in emerging-market securities and the country risk analysis techniques used to evaluate emerging market economies;

n compare the major approaches to economic forecasting;

o demonstrate the use of economic information in forecasting asset class returns;

p explain how economic and competitive factors can affect investment markets, sectors, and specific securities;

q discuss the relative advantages and limitations of the major approaches to forecasting exchange rates;

r recommend and justify changes in the component weights of a global investment portfolio based on trends and expected changes in macroeconomic factors.

Reading 16 Equity Market Valuation

R16 overview

a explain the terms of the Cobb-Douglas production function and demonstrate how the function can be used to model growth in real output under the assumption of constant returns to scale;

b evaluate the relative importance of growth in total factor productivity, in capital stock, and in labor input given relevant historical data;

c demonstrate the use of the Cobb-Douglas production function in obtaining a discounted dividend model estimate of the intrinsic value of an equity market;

d critique the use of discounted dividend models and macroeconomic forecasts to estimate the intrinsic value of an equity market;

e contrast top-down and bottom-up approaches to forecasting the earnings per share of an equity market index;

f discuss the strengths and limitations of relative valuation models;

g judge whether an equity market is under-, fairly, or over-valued using a relative equity valuation model.