Free CFA-Level-III Exam Braindumps
CFA Level III Chartered Financial Analyst Questions 126–130 (page: 27)

Travis Smith, CFA, is chief economic strategist and market analyst for Nashville Capital Management. He is developing a forecast of the S&P 500 stock market index utilizing different approaches.
Using microeconomic analysis, Smith wants to value the S&P using a dividend discount model (DDM) valuation approach. The trailing recent 52-week dividend for the S&P 500 equaled $60. Used as a proxy for the nominal risk-free rate, Treasury rates are as follows:
• 3-month T-bill rate: 3.5%
• 30-year T-bond rate: 5.0%
Smith uses an equity market premium equal to 6%. His estimate for the long-term outlook for ROE is 11%, and the long-run earnings retention rate is estimated at 40%.
Smith also is forecasting the market trends using varied macroeconomic techniques. He believes that security prices reflect expectations about the general economy. During his monitoring and forecasting of the overall economy, Smith is evaluating cyclical indicators and the business cycle. Smith has focused his analysis on three indicators:
1. Index of industrial production.
2. Interest rate spread between 10-year T-bonds and the fed funds rate.
3. Stock prices.
Smith is particularly interested in using stock market trends to predict economic turning points.
In conducting his research, Smith has found that the business cycle appears to be in the slowdown phase. In his capital markets forecasting activities, Smith looks at government policy, and attempts to predict business and consumer activity, along with foreign trade. Smith has determined that government policy has a significant influence on the business cycle, and he is trying to predict changes in government policy. Smith predicts that the government fiscal policy will loosen and that the Federal Reserve monetary policy will tighten. Smith estimates the following variables:
• Short-term neutral interest rate: 3.5%
• Nominal GDP long-term growth rate trend: 4.25%
• Federal Reserve inflation target: 2.25%
Smith forecasts that inflation will increase to 3.0%, and nominal GDP will grow at a 1.5% rate.
Smith's supervisor, Rasheed Gupta, requests a valuation of the S&P500 using a free cash flow to equity (FCFE) model. Gupta makes the following statement:
"A valuation model that replaces dividends with free cash flow to equity is a good alternative to the DDM If 1 remember correctly, free cash flow to equity equals net income plus depreciation."

Using his fiscal and monetary policy forecasts, Smith should forecast that the yield curve will:

Travis Smith, CFA, is chief economic strategist and market analyst for Nashville Capital Management. He is developing a forecast of the S&P 500 stock market index utilizing different approaches.
Using microeconomic analysis, Smith wants to value the S&P using a dividend discount model (DDM) valuation approach. The trailing recent 52-week dividend for the S&P 500 equaled $60. Used as a proxy for the nominal risk-free rate, Treasury rates are as follows:
• 3-month T-bill rate: 3.5%
• 30-year T-bond rate: 5.0%
Smith uses an equity market premium equal to 6%. His estimate for the long-term outlook for ROE is 11%, and the long-run earnings retention rate is estimated at 40%.
Smith also is forecasting the market trends using varied macroeconomic techniques. He believes that security prices reflect expectations about the general economy. During his monitoring and forecasting of the overall economy, Smith is evaluating cyclical indicators and the business cycle. Smith has focused his analysis on three indicators:
1. Index of industrial production.
2. Interest rate spread between 10-year T-bonds and the fed funds rate.
3. Stock prices.
Smith is particularly interested in using stock market trends to predict economic turning points.
In conducting his research, Smith has found that the business cycle appears to be in the slowdown phase. In his capital markets forecasting activities, Smith looks at government policy, and attempts to predict business and consumer activity, along with foreign trade. Smith has determined that government policy has a significant influence on the business cycle, and he is trying to predict changes in government policy. Smith predicts that the government fiscal policy will loosen and that the Federal Reserve monetary policy will tighten. Smith estimates the following variables:
• Short-term neutral interest rate: 3.5%
• Nominal GDP long-term growth rate trend: 4.25%
• Federal Reserve inflation target: 2.25%
Smith forecasts that inflation will increase to 3.0%, and nominal GDP will grow at a 1.5% rate.
Smith's supervisor, Rasheed Gupta, requests a valuation of the S&P500 using a free cash flow to equity (FCFE) model. Gupta makes the following statement:
"A valuation model that replaces dividends with free cash flow to equity is a good alternative to the DDM If 1 remember correctly, free cash flow to equity equals net income plus depreciation."

In order to assess the Fed's position and forecast changes in short-term interest rates, using the Taylor Rule, what is the optimal short-term interest rate, based on Smith's assumed values for interest rates, inflation, and growth?

Travis Smith, CFA, is chief economic strategist and market analyst for Nashville Capital Management. He is developing a forecast of the S&P 500 stock market index utilizing different approaches.
Using microeconomic analysis, Smith wants to value the S&P using a dividend discount model (DDM) valuation approach. The trailing recent 52-week dividend for the S&P 500 equaled $60. Used as a proxy for the nominal risk-free rate, Treasury rates are as follows:
• 3-month T-bill rate: 3.5%
• 30-year T-bond rate: 5.0%
Smith uses an equity market premium equal to 6%. His estimate for the long-term outlook for ROE is 11%, and the long-run earnings retention rate is estimated at 40%.
Smith also is forecasting the market trends using varied macroeconomic techniques. He believes that security prices reflect expectations about the general economy. During his monitoring and forecasting of the overall economy, Smith is evaluating cyclical indicators and the business cycle. Smith has focused his analysis on three indicators:
1. Index of industrial production.
2. Interest rate spread between 10-year T-bonds and the fed funds rate.
3. Stock prices.
Smith is particularly interested in using stock market trends to predict economic turning points.
In conducting his research, Smith has found that the business cycle appears to be in the slowdown phase. In his capital markets forecasting activities, Smith looks at government policy, and attempts to predict business and consumer activity, along with foreign trade. Smith has determined that government policy has a significant influence on the business cycle, and he is trying to predict changes in government policy. Smith predicts that the government fiscal policy will loosen and that the Federal Reserve monetary policy will tighten. Smith estimates the following variables:
• Short-term neutral interest rate: 3.5%
• Nominal GDP long-term growth rate trend: 4.25%
• Federal Reserve inflation target: 2.25%
Smith forecasts that inflation will increase to 3.0%, and nominal GDP will grow at a 1.5% rate.
Smith's supervisor, Rasheed Gupta, requests a valuation of the S&P500 using a free cash flow to equity (FCFE) model. Gupta makes the following statement:
"A valuation model that replaces dividends with free cash flow to equity is a good alternative to the DDM If 1 remember correctly, free cash flow to equity equals net income plus depreciation."

Supervisor Gupta's recommendations for the calculation of FCFII will lead to a valuation of the S&P 500 that most likely is:

Kim Simpson, CFA, manages a $75 million multi-cap growth portfolio. Simpson utilizes a growth at a reasonable price (GARP) investment strategy and her investment universe consists of small, medium and large capitalization stocks. She turns the entire portfolio over once each year. Simpson is concerned about the amount of trading costs she has generated through the implementation of her investment strategy. Simpson decides to conduct a trade cost analysis with the cooperation of her trader, Janet Long, CFA. Simpson believes the results of the trading analysis can be used to improve trading performance and help to refine her investment strategy. The first trade they examine is a purchase of 2000 shares of Technology Company that was completed using a market order. Simpson remembers adding to her Technology Company position based on her analyst's recommendation that the company was going to generate earnings significantly above the consensus estimate in a soon to be released earnings report. The order was split into two trades as shown in Figure 1.
Figure 1: Technology Company buy order for 2000 shares

In conducting a comprehensive analysis of the trading markets, Simpson states that she is most concerned about market liquidity. Simpson defines a market with good liquidity as one with diversity of opinion, many buyers/ sellers and relatively wide bid-ask spreads. In addition to reviewing market liquidity, Simpson believes that, in order to assess market quality, both the ease with which investors can obtain accurate information and the certainty that a trade will be completed must be evaluated.
Simpson and Long review their trade of Nano Corporation, a small biotechnology company. Simpson used a limit order because her analyst had established a specific buy target and she wanted to hold down transaction costs. To handle both explicit and implicit trading costs, Simpson measures execution costs using implementation shortfall. The buy order for 100,000 shares of Nano stock has the following timeline:
• Nano stock price closes at $35.00 per share.
• Day one: Simpson places a limit order for 100,000 shares of Nano stock at $34.75 per share or better at the opening of trading. However, Nano's stock never falls below $35.00 per share and closes at $36.50 per share.
• Day two: Simpson adjusts her limit order price to $37.00 per share or better. Long is able to fill 50,000 shares of the order at $36.75 per share. Nano's stock climbs to $38.00 per share during the day and Simpson moves the limit price to $40.00 per share or better. Long completes the purchase of the remaining 50,000 shares of Nano at $40.00 per share, which is also the closing price of Nano's stock.
• The commission for each block trade is $2,500.

Long suggests implementing the Best Execution concept as established by the CFA Institute in its Trade Management Guidelines. Long states best execution would accept a high portfolio turnover strategy provided the overall portfolio value is greater after trading costs. Long asserts that her professional relationships are integral to best execution.
The buy order for the Technology Company shares has an average effective spread closest to:

Kim Simpson, CFA, manages a $75 million multi-cap growth portfolio. Simpson utilizes a growth at a reasonable price (GARP) investment strategy and her investment universe consists of small, medium and large capitalization stocks. She turns the entire portfolio over once each year. Simpson is concerned about the amount of trading costs she has generated through the implementation of her investment strategy. Simpson decides to conduct a trade cost analysis with the cooperation of her trader, Janet Long, CFA. Simpson believes the results of the trading analysis can be used to improve trading performance and help to refine her investment strategy. The first trade they examine is a purchase of 2000 shares of Technology Company that was completed using a market order. Simpson remembers adding to her Technology Company position based on her analyst's recommendation that the company was going to generate earnings significantly above the consensus estimate in a soon to be released earnings report. The order was split into two trades as shown in Figure 1.

Figure 1: Technology Company buy order for 2000 shares


In conducting a comprehensive analysis of the trading markets, Simpson states that she is most concerned about market liquidity. Simpson defines a market with good liquidity as one with diversity of opinion, many buyers/sellers and relatively wide bid-ask spreads. In addition to reviewing market liquidity, Simpson believes that, in order to assess market quality, both the ease with which investors can obtain accurate information and the certainty that a trade will be completed must be evaluated.
Simpson and Long review their trade of Nano Corporation, a small biotechnology company. Simpson used a limit order because her analyst had established a specific buy target and she wanted to hold down transaction costs. To handle both explicit and implicit trading costs, Simpson measures execution costs using implementation shortfall. The buy order for 100,000 shares of Nano stock has the following timeline:
• Nano stock price closes at $35.00 per share.
• Day one: Simpson places a limit order for 100,000 shares of Nano stock at $34.75 per share or better at the opening of trading. However, Nano's stock never falls below $35.00 per share and closes at $36.50 per share.
• Day two: Simpson adjusts her limit order price to $37.00 per share or better. Long is able to fill 50,000 shares of the order at $36.75 per share. Nano's stock climbs to $38.00 per share during the day and Simpson moves the limit price to $40.00 per share or better. Long completes the purchase of the remaining 50,000 shares of Nano at $40.00 per share, which is also the closing price of Nano's stock.
• The commission for each block trade is $2,500.
Long suggests implementing the Best Execution concept as established by the CFA Institute in its Trade Management Guidelines. Long states best execution would accept a high portfolio turnover strategy provided the overall portfolio value is greater after trading costs. Long asserts that her professional relationships are integral to best execution.

Which one of the following trader motivations best describe the Technology Company trade?