CFA mock morning session Q11: 1) if it (P/E) is currently above its mean reversion level, the P/E will tend to fall suggesting that underweighting stocks would be appropriate. I picked overweight stocks which is wrong. why is it underweight? Afternoon session Q 53 2) a receiver swaption is equivalent to a call option put option makes more sense to me…anyone understood the logic behind this?
1.If P/E is is above the mean reverting level, it will fall, meaning the prices of stocks should fall. Why would you want to overweight your portfolio with declining stocks? 2.They are referring to a call option on a bond. Receiver swaption —> expectation rates will go down Call option on a bond —> expectation rates will go down, causing bond prices to rise
once again the curriculum assumes that a company with a higher PE ratio is more desirable.
Not at all - they’re simply saying that you know the price of the stock is going to go down, so why would you buy it at its currently (inflated) price. There is no subjective judgment placed on desire or which company is “better”; it’s simple mathematics. As an aside, I just got done the AM version of the CFA mock and I feel like I want to fugging cry (73).
I believe it is subjective because it is assuming that an investor is only concerned with the reversion to the mean. Value investors would not agree with this if they believe in the long term growth of the company. You can look at it from the point of view of, “Well, the P in PE is going to drop so you shouldn’t buy it,” but that is not simple mathematics, its simple market timing. Value investors prefer Low PE ratio companies because historically they have performed better. If you want to look at it from straight mathematics, would you rather invest for a short term reversion to the mean or a longer term valued investment that can help you attain longer term investment objectives? Run a regression of long term buy and hold strategy based off of low PE companies and compare that with returns from this method of using a MRL that in itself can be considered “subjective” since you are assuming that stocks will revert to the mean and I believe the buy and holders will take it. leave it to me to spend all this time thinking about something that is never going to show up on the exam.
“I believe it is subjective because it is assuming that an investor is only concerned with the reversion to the mean.” I stopped reading your post after this sentence (no BS, you could’ve written that you shot JFK in the next two paragraphs, I’ll never know). The point of the question is that if you like the stock at a 50P/E, then you’ll love it at a 40P/E. I’m sorry you wasted your time typing whatever it is that you typed after that first sentence.
> The point of the question is that if you like the > stock at a 50P/E, then you’ll love it at a 40P/E. listen douchebaginaire. I get the concept of the question. I guess your only experience in finance may be what you studied in the CFA books. Many investors prefer Low PE companies to High PE companies. Period. But if your only reading the first couple of sentences in the chapter and incorrectly assuming you already know everything, this isn’t that surprising.
“I get the concept of the question” No, you clearly don’t. Regardless, good luck to you on June 6th; you sound like you could use it.
actually, i can use it. thank you very much. im not guaranteeing i will pass, but i will be looking for your results post and if you dont pass you better believe you will be hearing from me. someone who talks with your confidence is either very smart or very douchish. im interested to see where you fall. if you do pass (and honestly i hope we both pass), i take it all back. i will be looking forward to congratulating you on your “pass” post on the results thread. i will likely be on this same forum next year.
Well that sounds like a dare; I humbly accept. Good luck to you, and I hate to spoil any surprise or conclusions you may draw from what I post in August, but I’ll reveal right now that I think that I’m both smart and a douche.
***bell sounds**** Round 2…go
skillionaire Wrote: ------------------------------------------------------- I think > that I’m both smart and a douche. well, diversification is key! in all honesty skill, good luck. i think everyone on this forum except CP can use it. ps. i would never really rag on anyone for not passing. i like making idle threats when im stressed.
Thanks man, you too. Time for bed, I’m spent…good night all.
sleep tight buddy. turn off the light. and dont forget that im watching you sleep.
SkipE99 Wrote: ------------------------------------------------------- > I believe it is subjective because it is assuming > that an investor is only concerned with the > reversion to the mean. Value investors would not > agree with this if they believe in the long term > growth of the company. You can look at it from > the point of view of, “Well, the P in PE is going > to drop so you shouldn’t buy it,” but that is not > simple mathematics, its simple market timing. > Value investors prefer Low PE ratio companies > because historically they have performed better. > > If you want to look at it from straight > mathematics, would you rather invest for a short > term reversion to the mean or a longer term valued > investment that can help you attain longer term > investment objectives? Run a regression of long > term buy and hold strategy based off of low PE > companies and compare that with returns from this > method of using a MRL that in itself can be > considered “subjective” since you are assuming > that stocks will revert to the mean and I believe > the buy and holders will take it. > > leave it to me to spend all this time thinking > about something that is never going to show up on > the exam. Speaking like a true asset manager! Promise me you will never invest your client’s assets exactly how CFAI thinks you should. It’s an art and a science, not just a science like CFAI thinks it is.