Deck 13: Economymarket Analysis

Question 1

Stock investors pay attention to the bond market because:

A) it is more stable than the stock market.
B) it provides signals about interest rate expectations.
C) it is a more accurate measure of overall economic activity.
D) it is privy to more government information, especially from the Federal Reserve.

Answer 1

B

Question 2

Historically, the average revision in the Bureau of Economic Analysis' GDP growth rate forecast from its advance to final estimate has been approximately:

A) 1/4 of a percentage point.
B) 2/3 of a percentage point.
C) 1 percentage point.
D) 5 percentage points.

Answer 2

B

Question 3

Many investors view an inverted yield curve as a precursor to:

A) an accelerating economy.
B) a slowing economy.
C) a recession.
D) rising inflation.

Answer 3

C

Question 4

Which of the following is considered a leading indicator of a country's economy?

A) Unemployment rate
B) Stock prices
C) Money supply
D) Interest rate spread

Question 5

The advance estimate by the Bureau of Economic Analysis predicts direction of quarterly change in real GDP growth approximately what percent of the time?

A) 10%
B) 25%
C) 50%
D) 90%

Question 6

Most analysts believe that the best measure of overall U.S. economic activity is:

A) real GDP.
B) nominal GDP.
C) real GNP.
D) nominal GNP.

Question 7

Which of the following is included in Gross Domestic Product (GDP)?

A) The value of final goods, only
B) The value of final goods and services, only
C) The value of final goods, services, and labor, only
D) The value of final goods, services, labor, and capital

Question 8

When interest rates fall, bond prices:

A) rise.
B) fall.
C) remain unchanged.
D) rise or fall depending on the expected inflation premium.

Question 9

Which of the following is a publication that compiles consensus economic forecasts?

A) The Wall Street Journal's Economic Letter
B) The Conference Board's Economic Forecast
C) The Kiplinger Letter
D) Blue Chip Economic Indicators

Question 10

In the U.S., the largest component of GDP is:

A) government spending.
B) business investment.
C) consumer spending.
D) real estate expenditures.

Question 11

The period from a peak to a trough in economic activity is:

A) a cycle.
B) an inflection point.
C) a recession.
D) a depression.

Question 12

When speculation pushes asset prices to unsustainable highs, this is known as a:

A) crash.
B) contraction.
C) recession.
D) bubble.

Question 13

The institution most involved with the U.S. money supply and interest rates is:

A) the Treasury Department.
B) the Federal Reserve.
C) the Department of Commerce.
D) the U.S. Mint.

Question 14

The value of goods and services produced by foreign-owned business on U.S. land is included in:

A) U.S. GDP, only.
B) U.S. GNP, only.
C) both U.S. GDP and U.S. GNP.
D) neither U.S. GDP, nor U.S. GNP.

Question 15

The National Bureau of Economic Research (NBER) is:

A) a division of the Department of Commerce of the U.S. Government.
B) an association of academic and professional economic forecasters.
C) a unit within the U.S. Federal Reserve.
D) a private nonprofit organization.

Question 16

In the U.S., since the end of World War II, the typical business cycle contraction has had a duration of:

A) 10 months.
B) 21 months.
C) 32 months.
D) 46 months.

Question 17

Which of the following is not a type of index of general economic activity?

A) Lagging indicators
B) Emerging indicators
C) Leading indicators
D) Coincident indicators

Question 18

What portion of the world's market capitalization is comprised of U.S. firms?

A) Approximately 1/5
B) Approximately 1/4
C) Approximately 1/3
D) Approximately 1/2

Question 19

Which of the following is not a component of GDP?

A) Business investment spending
B) Government investment spending
C) Net exports
D) Financial transactions

Question 20

In the early stages of a business cycle, the yield curve is usually:

A) upward sloping.
B) flat.
C) downward sloping.
D) humped.

Question 21

The relationship between the stock market and the business cycle is generally considered reliable, but the stock market tends to give false signals about:

A) business cycle peaks (booms).
B) business cycle troughs (recessions).
C) business cycle inflection points between peaks and troughs.
D) ex post stock market returns.

Question 22

Which of the following are the two components of the Fed's dual mandate?

A) Interest rates and stock prices
B) Gold prices and interest rates
C) Unemployment and the inflation rate
D) GDP growth and money supply growth

Question 23

When investors say that "the market" is up, they are usually referring to:

A) the DJIA.
B) the NYSE.
C) the NASDAQ.
D) GDP.

Question 24

Which of the following statements regarding market P/E ratios is true?

A) P/E ratios are higher when interest rates are lower.
B) P/E ratios are higher when dividend yields are higher.
C) P/E ratios are higher when inflation is higher.
D) P/E ratios are higher when unemployment is lower.

Question 25

The Fed model, which uses the E/P ratio in its calculations:

A) is relatively complex.
B) uses the yield on the 3-month Treasury bill as the risk-free rate.
C) assumes investors can easily switch between stocks and bonds.
D) is used by the Federal Reserve to assess its monetary policy.

Question 26

Despite political, cultural, and economic differences, foreign markets are driven largely by the same factors that drive U.S. markets.

Question 27

Traditionally, how many months before an economic recovery have stock prices started increasing?

A) 3-5, with 4 typical
B) 5-7, with 6 typical
C) 8-10, with 9 typical
D) 10-12, with 11 typical

Question 28

Traditionally, when have stock prices generally peaked?

A) Two years before the start of a recession
B) One year before the start of a recession
C) At the start of a recession
D) One year after the start of a recession

Question 29

To value the market, an investor must analyze both corporate earnings and multipliers.

Question 30

Which of the following actions is the Federal Reserve most likely to take to stimulate the economy?

A) Selling bonds
B) Buying bonds
C) Increasing spending
D) Reducing the reserve requirement

Question 31

With a steep, upward-sloping yield curve, investors expect:

A) inflation rates and interest rates to increase.
B) inflation rates to increase and interest rates to decrease.
C) inflation rates to decrease and interest rates to increase.
D) inflation rates and interest rates to decrease.

Question 32

Which of the following groups is responsible for executing the Fed's directives to change the money supply?

A) Board of Governors
B) FDIC
C) FOMC
D) NBER

Question 33

Current stock prices reflect:

A) investors' confidence in the current economy.
B) investors' confidence in the current administration.
C) investors' expectations of the future.
D) investors' attitudes about the past market.

Question 34

If the trailing P/E for the S&P 500 is 18 and the forward P/E for the S&P 500 is 15, which of the following is true?

A) The stock market is expected to decrease
B) The stock market is expected to increase
C) Corporate earnings are expected to decrease
D) Corporate earnings are expected to increase

Question 35

Warren Buffett thinks long-term movements in stock prices are caused by which of the following two economic variables?

A) Interest rates and corporate profits
B) Interest rates and the value of the dollar
C) Inflation and unemployment
D) Inflation and growth in GDP

Question 36

What are the three major components of the Grinold Kroner model?

A) Net profit margin, total asset turnover and equity multiplier
B) Market risk premium, SMB and HML
C) Unemployment, inflation and growth in GDP
D) Income return, earnings growth and repricing

Question 37

P/E ratios are generally depressed when interest rates:

A) are high and inflation expectations are low.
B) are low and inflation expectations are high.
C) are high and inflation expectations are high.
D) are low and inflation expectations are low.

Question 38

The earnings yield used in the Fed model is the:

A) same as the dividend yield.
B) inverse of the dividend yield.
C) same as the P/E ratio.
D) inverse of the P/E ratio.

Question 39

The longest peacetime expansion began in 2009.

Question 40

Which of the following types of yield curves is typically considered to be associated with an economic expansion?

A) A steep, upward-sloping yield curve
B) A flat yield curve
C) An inverted yield curve
D) A positively skewed yield curve

Question 41

Why is the stock market a leading indicator of the economy? Use the constant-growth dividend discount model in your explanation.

Question 42

If interest rates rise, the risk-free rate declines.

Question 43

Over the past 30 years, the average P/E ratio for the S&P 500 has been 20.

Question 44

Stock prices have almost always risen as the business cycle is approaching a trough.

Question 45

The Fed model is based on the premise that expansive Fed policy promotes favorable stock market returns.

Question 46

On average, the typical business cycle in the United States leads the stock market's turning point by a few months.

Question 47

Most analysts agree that using the money supply as an indicator of future economic activity is accurate.

Question 48

According to the Fed model, investors should overweight stocks when 10-year T-bonds are yielding more than the S&P 500 earnings yield.

Question 49

Why do stock investors pay attention to the bond market?

Question 50

During periods of restrictive Federal Reserve monetary policy, the stock market usually performs poorly.

Question 51

The stock market is a leading indicator of the economy because investors discount future cash flows.

Question 52

The credit spread widens during periods of increased economic uncertainty.

Question 53

According to available evidence, investors lose more by missing a bull market than by staying in a bear market.

Question 54

The Dow Jones Industrial Average provides the best representation of the performance of U.S. stocks.

Question 55

Investors should keep a watch on the Federal Reserve because of the effect of Fed policy actions on interest rates and security returns.

Question 56

Assuming a constant P/E ratio, the growth in stock prices should equal the growth in earnings.

Question 57

If the economy is prospering, investors expect corporate earnings to rise.

Question 58

P/E ratios are generally low when interest rates and inflation are high.

Question 59

The VIX is often referred to as the fear index.

Question 60

When using the P/E valuation model, it is important to remember that the multiplier is more volatile than the earnings component.

Question 61

An analyst is considering the following forecasted economic data for France: risk-free rate = 2.5%; dividend yield = 1.5%; share repurchases = 1%; nominal earnings growth = 3%; inflation = 1.3%; and change in P/E = 1%. Based on Grinold Kroner model, what is the estimated stock market return for France?

Question 62

Assume that the dividends to be paid on a market index next period are expected to be $20. Investors require 15 percent to invest in stocks and expect dividends to grow at 10 percent per year. What is the value of this index?

Question 63

The EPS on a composite stock index this past year was $3.25. The earnings are expected to grow at a constant rate of 7 percent forever. The dividend payout ratio is expected to continue at its current rate of 35 percent, and the dividend yield is expected to be 4 percent. Calculate the intrinsic value of the index.

Question 64

What are the implications of the evidence regarding bear markets?

Question 65

Is it useful to do a trend analysis of P/E ratios of the S&P 500 Composite Index over time and extrapolate it to project future expected P/Es?

Question 66

Use the constant-growth dividend discount model to explain why stock prices have an inverse relationship to interest rates.

Question 67

How does the increased globalization of business and finance affect business cycles and the leading, lagging, and coincident economic indicators?

Question 68

Explain the monetary policy the Fed is likely to implement if it believes that inflation has become a primary concern for the U.S. economy in the future. Indicate how the Fed is likely to implement this monetary policy.

Question 69

Why is there an inverse relationship between P/Es and dividend yield?

Question 70

The financial news reports that the market is overvalued at a near record high based on the earnings multiplier. What does that mean to you?

Question 71

Value Line's estimated dividends on an index for next year are $2.00 while estimated earnings are $4.30. The expected spread between k and g is 4%.
(a) What is the P/E ratio?
(b) What is the estimated price for this index?

Question 72

Explain how the S&P 500 dividend yield can be used to make market forecasts.