Economics and Investment Markets

Free CFA Level II lesson in Portfolio Management. 13 min read, ~1,939 words.

Nominal risk-free rate = real rate + expected inflation + term premium. Forward-looking ERP (DDM-based) is preferred over historical; the historical 6 to 7% average is inflated by survivorship bias and non-repeatable P/E expansion. Taylor rule: policy rate = r* + inflation + 0.5(inflation gap) + 0.5(output gap), where the...