CFA Economics

Volatility Forecasting

 Estimating a single variance that is believed to be constant is straightforward: The familiar sample variance is unbiased and its precision can be enhanced by using higher-frequency data. The analyst’s task becomes more complicated if the variance is not believed to be constant or the analyst needs to forecast a variance–covariance (VCV) matrix. The VCV … Read more

CFA Economics

Real Estate Forecasting

Real estate is inherently quite different from equities, bonds, and cash. It is a physical asset rather than a financial asset. It is heterogeneous, indivisible, and immobile. It is a factor of production, like capital equipment and labor, and as such, it directly produces a return in the form of services. Its services can be … Read more

CFA Economics

Singer – Terhaar Model

he Singer-Terhaar model is based on two versions of the international Capital Asset Pricing Model (CAPM): one in which global asset markets are fully integrated, and another in which markets are fully segmented. The model then looks at the expectations of actual segmentation/integration and takes a weighted average of the two assumptions to calculate returns. The Singer-Terhaar approach begins … Read more

CFA Economics

Grinold-Kroner Model

The Grinold-Kroner model states that the expected return of a stock is its dividend yield, plus the inflation rate, plus the real earnings growth rate, minus the change in stock outstanding, plus changes in the P/E ratio: E(Re)≈ D/P + (%ΔE − %ΔS) + %ΔP/E where: E(Re) = expected equity return D/P = dividend yield %ΔE = … Read more

CFA Economics

Equity Forecasting

When looking at a very long time horizon—over 100 years—mean real returns of equity markets in various countries do not show statistically meaningful differences. These sample averages tend to be imprecise, unless the volatility of the data is small. As we saw, shrinkage estimators are typically more reliable as predictors of equity returns. Discounted Cash … Read more

CFA Economics

Emerging Market Bonds

Investing in emerging market debt involves all the same risks as investing in developed country debt, such as interest rate movements, currency movements, and potential defaults. In addition, it poses risks that are, although not entirely absent, less significant in developed markets. These risks fall roughly into two categories: (1) economic and (2) political and … Read more

CFA Economics

Fixed Income Forecasting

There are three main ways to approach forecasting fixed-income returns. The first is discounted cash flow. This method is really the only one that is precise enough to use in support of trades involving individual fixed-income securities. The second approach is the risk premium approach, which is often applied to fixed income, in part because … Read more

CFA Economics

Forecasting Asset Class Returns: Intro and Tools

Although investment opportunities are not constant, virtually all forecasting techniques rely on notions of central tendency, toward which opportunities tend to revert over time. This fact means that although asset prices, risk premiums, volatilities, valuation ratios, and other metrics may exhibit momentum, persistence, and clustering in the short run, over sufficiently long horizons, they tend … Read more