CFAI Mock 2014 - Item Set 3

CFA Level III Economics
#1

Friends,

This query is regarding Item Set headed Ptolemy - Question 3 of Item Set 3.

  1. Why Change in P/E = (-0.4%)? It should be 0.4% since P/E changed from 15 to 15.6 in 10 years.

  2. If expected repurchase yield is 1%, why has the solution subsituted/used (-1%)?

Thanks in advance!

#2

repurchase yield = - Change in Shares outstanding.

and -(deltaS) is used in the grinold Kroner.

So Repurchase yield is directly added (WITH ITS SIGN) when provided.

If it is 1% - add 1%. if it is -.5% - subtract -0.5%.

#3

Thanks cpk123. That’s so simple to remember now.

#4

you should annualize the 10 year pe since its not for the coming expected (year) its for the expected 10 years.

#5

  1. Expected P/E 10 years prior = 15

  2. Current P/E =15.6

That means, the p/E has changed from 15 to15.6 in the last 10 years. So, delta(P/E) should be +0.4% and not -0.4% even with annualization.

Am I missing something here?

#6

when you calculate the delta you put (new - old ) / old since its the EXPECTED not past :). (15-15.6 )/ 15.6

#7

Makes sense now. I got confused with Expected and 10 years prior in the same line.

Thanks for clarifiing :slight_smile:

#8

still not convinced :frowning:

#9

this one got me too.

it’s actually expected 10 year p/e now. for example, the expected p/e in 2024 is 15 now.

#10

Got me too. Jsshuai has it right. Confusing wording though.

#11

The question is poorly worded. It’s complete bs that we’re supposed to interpret “Expected P/E 10 Years Prior” to mean “current P/E 10 years from now”.

Clearly the CFAI got a little lazy this year and hired Schweser to write their mock…

#12

^^+1 cool

#13

If repurchase yield is negative this means actual number of shares has increases yes? So when they right it is 1 it positive but grinold has - or shall we just ignore it because I seen it both ways…

#14

The repurchase yield is positive in this question (as given in the question at 1%) indicating net shares have been repurchased not issued (number of shares is reduced). Think of the term “repurchase yield” as “the overall yield I get from the net of repurchase and issuance activity” and keep in mind that it is a different than saying “change in shares outstanding” (repurchase yield = (-1*change in shares)). In this case, by giving a positive number in the question they are indicating that the repurchase activity was such that it added to the overall return. This is why it was added. The rule for this is ultimately that if the number of shares outstanding decreases, it adds to the overall return. If the number of shares in the market increases, it detracts from the overall return.

#15

Also, I agree entirely with the statements above regarding the “expected” and “prior” language. I found this to be very confusing.

#16

Same item set, question 6.

What’s wrong with

Put structures will provide investors with some protection in the event that interest rates rise sharply but not if the issuer has an unexpected credit event.

To me, it look’s fine. If interest rates rise, I will execute my “put option” and return the bond to invest at newer, higher interest rates. And there is no protection against unexpected credit events.

What am I missing?

#17

The way I think about this is that if the company goes bancrupt, you won’t get your money back even with the put option.

#18

Follow this thread, I explained this to someone.

http://www.analystforum.com/forums/cfa-forums/cfa-level-iii-forum/91332900