where represent labour supply, wages, and tax in period The consumer takes wages
ID: 1108894 • Letter: W
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where represent labour supply, wages, and tax in period The consumer takes wages, taxes, and the rate of interest, is given. where represent labour supply, wages, and tax in period The consumer takes wages, taxes, and the rate of interest, is given. where represent labour supply, wages, and tax in period The consumer takes wages, taxes, and the rate of interest, is given. where represent labour supply, wages, and tax in period The consumer takes wages, taxes, and the rate of interest, is given. a) You have been asked to provide a company a short research note setting out the latest academic thinking and empirical evidence underlying the CAPM approach. The regulated company is increasingly concerned that the CAPM procedure used to calculate its cost of capital is outdated. Your conclusion should state what your view is on CAPM as a measure of the cost of capital. b) You have been asked to provide a finance ministry with a short research note on the latest academic thinking and empirical evidence on the yield curve's ability to forecast the future path of the macro-economy. The finance ministry is considering whether to add a yield curve measure to the existing variables they use to forecast the economy. Your conclusion should state a clear view on the information content of the yield curve historically and in more recent times.Explanation / Answer
a) Capital Asset Pricing Model(CAPM) is a model widely used to describe the relationship between systematic risk and expected return for assets, especially stocks. It helps us to calculate investment risk and what rate of returns can we expect.
As per the modernportfolio theory,specificrisk can be eliminated through diversification. The major problem still persisting is that systematic risk cannot be eliminated through diversification, even a portfolio of all shares in the stock market cannot eliminate this risk. Thus CAPM is an appropriate tool in the modern world also to measure the systematic risk.
b) There is a relationship between the curvature of the yield curve and its impact on the macroeconomic variables like inflation. Thus it is widely used for the same.
Yield curve levelhas been determined by Fed funds rate at low frequencies after which level the coherency between these variables moved progressively to cycles of longer periods.Inflation has led the yield curve level at business cycle frequencies but only until 1993, after which inflation volatility went down markedly. Yield curve level has not related closely with real economic activity like unemployment arte which has co-moved with the level with some lag at business cycle frequencies until 2005.
Thus due to inclusion of various macroeconomic variables like inflation, unemployment rate , Yield curve is not much effective in the modern scenario to predict the future path ofthe macroeconomy.
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