Questions - Which can help us pass ( i personally found tough and discussing)

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vicky_cool400

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Hi All,
In this thread i want to share questions, which i am finding tough and which seem quite testable. Lets discuss the solutions here.
[questions and answers removed by admin]
 
1) a
2) a
3) c (1585.0481?)
4) b
5) c
6) c even if I have 0.6929
 
Ok, this was tough. Too many of those on the exam and i’d run out of time. I’ve put my answers and explanations below, but I can’t guaranee they’re correct.
1.) A
4%-3.5% = 0.5% (or 1.04/1.035-1 = 0.48%). This is less than 0.80% historical average, so implies overvaluation.
2.) B
Fed model assumes no earnings growth. Required RoR would equal the earnings yield for both. Unless the ratio is 1 this doesn’t mean they’re equal. Not sure about the accoutning ROE, if we’re assuming no growth then shouldn’t this equal the earnings yield?
3.) C
E1/P0 = (3.5+1.2) - 0.1*10.5 = 3.65% (0.0365)
E1 = 4% * 1450 = 58
P0 = 58/0.0365 = 1,589.04
4.) B
The Yardini model includes a default risk premium (the corporate bond) but not an equity risk premium
5.) C
I assume we’re still talking about Yardini model here. If d goes up, the Yardini E/P goes down, meaning that the P/E must go up.
6.) C
4 = (1.2+3.5) - d(10.5)
10.5d = 0.7
d = 0.067
 
is this question from an exam? cna you make sure to put that details because if people haven’t taken exam, they might want to look at them after they take.
 
For number 1…. 4%-3.5% = 0.5% (or 1.04/1.035-1 = 0.48%). This is less than 0.80% historical average, so implies overvaluation
Huh?
Why isn’t it just 4% / 3.5% ? = 1.14……. Its above 1…. so its undervaled.. Average difference has been .8….. so this changes it up and its above that.. which makes it overvalued?
 
vicky_cool400 wrote:
1) a
2) b
3) c
4) b
5) c
6) c
2
Click to expand...
It would be great to post your solution a bit more in detail, so that we can discuss it. For example, is the five year earnings growth forecast for S&P 500 is 10.50% per year or do we have to use 1.105^1/5
 
BaseballRedhawks wrote:
For number 1…. 4%-3.5% = 0.5% (or 1.04/1.035-1 = 0.48%). This is less than 0.80% historical average, so implies overvaluation
Huh?
Why isn’t it just 4% / 3.5% ? = 1.14……. Its above 1…. so its undervaled.. Average difference has been .8….. so this changes it up and its above that.. which makes it overvalued?
Click to expand...
The two calculations I did were arithmetic and geometric. For a geometric calculation using percentages, we need to add 1 to the number in decimal format. The easiest way I can explain is, think of earning 20% in two periods. You don’t find the total added by multiplying 20*20 = 400, you do 1.20*1.20 -1 = 0.44 = 44%. Hence if we want to divide (say we had the end result but not period 2 return) we do 1.44/1.20 - 1 = 0.2 = 20%
If the yield is less than the average historical yield, that means you’re getting less yield (e.g. dividends) for your money, meaning that the index is currently overvalued.
 
vicky_cool400 wrote:
[question and answer removed by admin]
Click to expand...
I think that you want to see answer a), however, I would include the yield beta, too. Why not?
 
Risk Management
For 5%.
Manager 1 (Annual VAR) = 24,560
Manager 2 (Monthly VAR) = 2408
Manager 3 (Weeklyl VAR) = 480
Which manager has minimum annual var ?
 
vicky_cool400 wrote:
Risk Management
For 5%.
Manager 1 (Annual VAR) = 24,560
Manager 2 (Monthly VAR) = 2408
Manager 3 (Weeklyl VAR) = 480
Which manager has minimum annual var ?
Click to expand...
Not sure we can make a comparison
 
^^Sure you can – just annualize the VaR for Managers 2 and 3.
The fact that Vicky finds these relatively simple questions “tough” is a bad sign for him, but a good one for you.
 
Annualize the VAR similar to how you annualize the standard deviation and compare all three.
 
Okay can u just confirm this place
days in a month = 20
Weeks - 52
days in a year = 250?
week = 5 days ?
These are the assumptions used for days ?
 
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