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NEW QUESTION: 1
Security analysts Andrew Tian, CFA, and Cameron Wong, CFA, are attending an investment symposium at the Singapore Investment Analyst Society. The focus of the symposium is capital market expectations and relative asset valuations across markets. Many highly-respected practitioners and academics from across the Asia-Pacific region are on hand to make presentations and participate in panel discussions.
The first presenter, Lillian So, President of the Society, speaks on market expectations and tools for estimating intrinsic valuations. She notes that analysts attempting to gauge expectations are often subject to various pitfalls that subjectively skew their estimates. She also points out that there are potential problems relating to a choice of models, not all of which describe risk the same way. She then provides the following data to illustrate how analysts might go about estimating expectations and intrinsic values.

The next speaker, Clive Smyth, is a member of the exchange rate committee at the Bank of New Zealand.
His presentation concerns the links between spot currency rates and forecasted exchange rates. He states that foreign exchange rates are linked by several forces including purchasing power parity (PPP) and interest rate parity (IRP). He tells his audience that the relationship between exchange rates and PPP is strongest in the short run, while the relationship between exchange rates and IRP is strongest in the long run. Smyth goes on to say that when a country's economy becomes more integrated with the larger world economy, this can have a profound impact on the cost of capital and asset valuations in that country.
The final speaker in the session directed his discussion toward emerging market investments. This discussion, by Hector Ruiz, head of emerging market investment for the Chilean Investment Board, was primarily concerned with how emerging market risk differs from that in developed markets and how to evaluate the potential of emerging market investments. He noted that sometimes an economic crisis in one country can spread to other countries in the area, and that asset returns often exhibit a greater degree of non-normality than in developed markets.
Ruiz concluded his presentation with the data in the tables below to illustrate factors that should be considered during the decision-making process for portfolio managers who are evaluating investments in emerging markets.


Based upon the information provided by So, the equity risk premium in Singapore and the intrinsic value of the Taiwan index are closest to:
Singapore E(risk prem.) Taiwan Index Value
A. 6.1% 9,500
B. 6.0% 9,800
C. 8.4% 7,125
Answer: A
Explanation:
Explanation/Reference:
Explanation:
The required return on the Singapore index can be estimated with the dividend discount model.

The market risk premium for Singapore = 8.544 - 2.4 = 6.144%. The market risk premium for Taiwan
6.144 x 1.10 = 6.76, so the required return on the market in Taiwan is 6.76 + 2.7 = 9.46%. Thus, we can estimate the intrinsic value of the Taiwan index.

(Study Session 6, LOS 23.c)

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