The Investment Advisor Body of Knowledge + Test Bank

CHAPTER 5 Global Capital Markets History and Valuation

It is critical for investment advisors and consultants to know and understand the history of global financial markets. This chapter looks back in time to review the history of stocks, bonds, interest rates, and inflation. The readings explore U.S. stock and bond markets as well as developed and emerging markets around the world.

The author introduces formulas and calculations as they pertain to measuring risk and return, but the emphasis in these readings is on reviewing and interpreting the history of the major fixed income and equities markets around the world over the past century.

The first reading looks back at historical asset prices for stocks and bonds both in the United States as well as in developed and emerging markets. The author explores long-term annual average returns of stock and bonds and looks at those returns in relation to risk and volatility. He also reviews the history of the equity premium and real returns net of inflation over various periods of time.

The concept of valuation is also explored as the author considers various arguments for traditional valuation measurements as well as alternative approaches. The discussion over equity valuation includes evidence supporting key drivers of valuation over time. This section also reviews historical inflation and bond yields.

Part I Portfolio Design: A Modern Approach to Asset Allocation: Long-Run Returns on Stocks and Bonds

Learning Objectives

• Discuss ...