September 2007 CA11 Q2

Discussion in 'CA1' started by calibre2001, Apr 16, 2009.

  1. calibre2001

    calibre2001 Member

    Question reads:

    Evidence suggests that a significant proportion of the price movements of many shares traded in a domestic equity market can be attributed to overall market movements rather than features of the specific companies.

    Explain why this may be the case.

    Looking at the examiner's comments,
    In part (i), answers tended to be too limited in scope, concentrating on the macro-economic factors. The question was asking why there is systemic risk in this situation, not what systemic risk is. Comments about domestic companies having similar resource costs were often made at a sector-specific level which missed the point oft the question. Few candidates got to grips with the issues leading to a block demand for equities, irrespective of individual company or sector performance. Many answers suffered from lack of clarity and structure, which led to much repetition and hence wasted time.

    I can see that the question is talking about systematic risk. And that we're supposed to explain why it causes demand and supply of equities to fluctuate (hence price change)

    But I don't see how the 'block demand of equities' bit comes in. A significant part of the answer are basically factors that cause investors to demand for assets (i.e. change in liabilities, regulatory changes etc)

    I'm under the impression the wording of the question isnt very clear. I just want to know what are the keywords that would point to the 'block demand of equities' bit. Appreciate your views. Thanks.
     
    calibre2001, Apr 16, 2009
    #1
  2. Mark Willder

    Mark Willder ActEd Tutor Staff Member

    This question asks why movements in individual share prices are highly correlated with movements in the market as a whole. The examiners give 7 reasons - 2 macro-economic reasons and 5 demand reasons (which the examiners call 'block demand' reasons in their report).

    The solution looks to be heavily biased towards the demand reasons. The macro-economic points could be expanded considerably if we had the time.

    I think the reason why the examiners have focused on demand for shares so much is a reflection of the focus of the core reading. There are several whole chapters that cover demand related issues (CIS, overseas, liability matching and chapter 21 which covers supply and demand). There is only one chapter on economic influences. If this had been an economics exam I would expect a lot more than just 2 pointson macro-economic reasons.

    In the exams it is important to give as wide an answer as possible to make sure you pick up all the marks. There is a danger in this question that you write lots of good stuff which only gets you the first mark. A good technique is to think through all the chapter headings and think whether they are relevant to the question.

    Best wishes

    Mark
     
    Mark Willder, Apr 16, 2009
    #2
  3. Edwin

    Edwin Member

    Hi Mark, you ddn't answer calibre's question. The examiner's failed to relate their answer to the question.

    They the ones that ask the questions and whether we pass or don't depends on them. But we gotta appreciate that they either threw out a bunch of demand factors and failed to link them to the question or they produced an answer to a different question.

    BUY ASET AND GET TO SEE A SOLUTION THAT MAKES SENSE using the same points as did the examiners.
     
    Last edited by a moderator: Jul 27, 2013
    Edwin, Jul 27, 2013
    #3

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