Cash
Nominal value preserved; real value erodes when inflation > short rates. Cash is a refuge when central banks hike aggressively.
Cash beats bonds when policy is tightening fast.
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CFA Level III | Quick Revision Notes
Section 1
A disciplined process to set capital market expectations and avoid ad-hoc forecasts.
Define the asset classes, the forecast horizon, and the level of detail needed (returns, risks, correlations).
Study past returns and macro drivers. History is the starting point, not the conclusion.
Choose econometric, discounted cash flow, risk premium, or survey-based methods — and the assumptions behind each.
Identify credible data: government statistics, central banks, broker research, proprietary databases.
Layer macro context (cycle phase, policy stance, valuations) on top of historical baselines.
Document estimates with clear assumptions, ranges, and rationale — auditable for later review.
Compare realized data to forecasts. Update the process when biases or gaps appear.
Section 2
Data Limitations
Limitations of economic data
Time lags, definitional changes, and revisions distort raw series.
Data measurement errors and biases
Transcription errors, survivorship bias, appraisal smoothing — silent corruption of inputs.
Limitations of historical estimates
Regime shifts mean past means and covariances may not repeat.
Analyst Biases
Anchoring bias
Tying forecasts too tightly to a starting reference point.
Status quo bias
Preferring current conditions to persist; underweighting change.
Confirmation bias
Seeking data that supports existing views; ignoring disconfirming evidence.
Overconfidence bias
Narrow forecast ranges; overestimating skill in prediction.
Prudence bias
Conservative forecasts to avoid extreme outcomes and embarrassment.
Model Uncertainty
Ex-post risk vs. ex-ante risk
Past volatility understates risk during low-volatility regimes; overstates it after shocks.
Section 3
Policy changes
Tax, regulation, deregulation
Political events
Elections, conflict, sanctions
Natural disasters
Supply chain disruption
Technology shocks
Productivity step-changes
Financial crises
Credit and liquidity shocks
Labor inputs
Labor productivity
Fixed income implications
Higher trend growth supports higher real yields. Demographic decline and slowing productivity argue for structurally lower neutral rates.
Equity implications
Sustained productivity gains expand corporate margins and justify higher equity valuations. Slower trend growth caps long-run earnings expansion.
Section 4
Three approaches, each with a trade-off between rigor and flexibility.
Pros
Cons
Pros
Cons
Pros
Cons
Section 5 · Centerpiece · Business Cycle Phases
Economic context
GDP growth picks up; output gap wide; inflation low; policy still accommodative.
Capital market effects
Bond yields trough or rise modestly. Equities rally strongly off lows. Credit spreads tighten quickly.
Keep scrolling — the cycle advances.
Section 6
Inflation surprises (not the level itself) drive most of the relative performance across asset classes.
Nominal value preserved; real value erodes when inflation > short rates. Cash is a refuge when central banks hike aggressively.
Rising inflation lifts nominal yields and pushes existing bond prices down. Real bonds (TIPS / inflation-linked) protect purchasing power.
Moderate, stable inflation is neutral to positive. High or volatile inflation compresses multiples and squeezes margins.
Hard asset with cash flows that often reset with inflation. Strong long-run inflation hedge — short-run sensitive to rates.
Section 7
The 2×2 of macro policy. The mix shapes the yield curve and growth.
Loose monetary + Loose fiscal
Maximum stimulus. Strong growth in the short run; risk of overheating, inflation, and currency weakness.
Tight monetary + Loose fiscal
Deficits financed at high rates. Currency strengthens; long yields rise; private investment crowded out.
Loose monetary + Tight fiscal
Steep yield curve. Currency weakens; growth supported by easy money; inflation risk contained by fiscal drag.
Tight monetary + Tight fiscal
Maximum restraint. Growth slows; inflation falls; risk of recession if applied too aggressively.
Central banks raise rates when inflation runs above target or output exceeds potential, and cut when the reverse holds.
Section 8
How the yield curve typically behaves across the cycle. Useful for fixed-income positioning.
Yield curve · Initial Recovery
1/5Initial Recovery
Scroll to morph the curve through every phase.
Section 9
Trade flows, supply chains, and commodity dependencies tie domestic growth to global cycles.
Capital is mobile. Policy divergence drives carry trades and pressures fixed-income spreads.
Currency moves redistribute returns across regions and feed back into inflation and corporate earnings.
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