Deck 12: Macro- and Industry Analysis of Share Markets

Question 1

Which of the following does Harvey (1988)believe is a useful leading indicator for predicting future economic growth?

Answer 1

C
Explanation: Harvey (1988)suggests the yield curve slope is a useful leading indicator of future economic growth,and finds that it is more accurate than either the share market or prior values of GDP.Harvey shows that increases in GDP are expected where the yield curve is upward sloping while decreases in GDP are expected where the yield curve is downward sloping.

Question 2

Supply side economics tends to focus on _______________.

A)government spending
B)price controls
C)monetary policy
D)increasing productive capacity

Answer 2

D
Explanation: The supply side of the economy involves factors of production,such as capital and labour.The level of supply has an impact on output and inflation.For example,it is possible for an increase in production to lead to increased inflation and increased nominal interest rates.Complex models have been constructed that focus on the relationship between the various factors of production and output,though supply is also affected by changes in technology.Improvements in technology do not follow a smooth progression over time.They tend to occur intermittently,with varying effects on production.

Question 3

The top-down investment approach identifies mispriced securities,and then forms a portfolio from them.

Answer 3

False
Explanation: In identifying mispriced securities,analysts typically use either a top-down or bottom-up approach.In the top-down analysis,the analyst starts at the market or macro level,attempting to forecast the movement of the market over the investment horizon.Once general movements are predicted,expected movements at the industry level are considered.Finally,after market and industry analysis is completed,individual security analysis begins.

Question 4

Macro-analysis of stocks involves consideration of assigning weights between all of the following except:

Question 5

Monetary policy is often believed to be most useful in times of:

Question 6

An increase in expected inflation,other things being equal,will lead to an increase in the discount rate for the dividend discount model.

Question 7

An indexed-linked bond is one where the price is linked to the:

A)All-Ordinaries
B)Consumer Price Index
C)world equity market index
D)industrial production index

Question 8

The demand side of an economy relates to government fiscal policy and government monetary policy.

Question 9

Layton (1994)models the Australian economy as a combination of periods of 'normal' and 'sluggish' growth.

Question 10

If the ICAPM beta is 1.2,and the world market return and risk-free rates are 14% and 6% respectively,then the expected return predicted by the ICAPM is:

Question 11

The investment approach where the analyst attempts to identify mispriced securities first and then construct a portfolio based on those securities is known as:

Question 12

The investment strategy of Siegel (1991)suggests that investors can profit by:

Question 13

In general,the stock market is much more volatile than GDP when using weekly and monthly data.

Question 14

The market value of all goods and services produced during a given time period is called industrial production.

Question 15

In studies of the predictability of GDP using the term structure by Harvey (1988),an upward sloping yield curve suggests future economic growth.

Question 16

An increase in the level of inflation will unambiguously lead to an increase in the retention rate of the firm.

Question 17

If interest rates increase,business investment expenditures are likely to __________ and consumer durable expenditures are likely to _________.

A)increase;increase
B)increase;decrease
C)decrease;increase
D)decrease;decrease

Question 18

Which one of the following is probably the most direct and immediate way to stimulate or slow the economy,although it is not very useful for fine-tuning economic performance?

A)Fiscal policy
B)Monetary policy
C)Supply-side policy
D)Rising minimum wages

Question 19

The study by Reilly,Griggs and Wong (1983)provides evidence that past EPS growth is a good predictor of future EPS growth.

Question 20

Studies of the Australian economy by Strong and Tan (1991)and Mayadunne,Evans and Inder (1995)suggest that research into the Australian economy consistently identifies substantial levels of persistence in economic growth,suggesting the traditional model of trend plus cyclical movements for economic growth may be invalid.

Question 21

It is generally argued that when pricing equities inflation risk is __________ it is for pricing bonds.

Question 22

In order to predict an industry price-earnings ratio,the following estimate(s)is/are needed:

Question 23

Companies exhibiting performance that is positively related to the business cycle are called:

Question 24

Assume the current risk premium is 6%,the risk-free rate of return is 3% and the beta of the equity market is 1.1.What is the discount rate based on the Capital Asset Pricing Model?

Question 25

The Global Industry Classification Standard (GICS)classifies industries in the Australian economy into how many sectors?

Question 26

Companies that are little affected by the business cycle,exhibiting reasonably stable performance independent of the level of economic activity are called:

Question 27

The goal of supply side policies is to _______.

A)increase government involvement in the economy
B)create an environment where workers and owners of capital have the maximum incentive and ability to produce and develop goods
C)maximise tax revenues of the government
D)focus more on wealth redistribution policies

Question 28

A firm has a P/E ratio of 0.80 and a cost of capital of 5% p.a.and has expected growth of dividends in perpetuity of 2% p.a.What is the share price of the firm?

Question 29

Fama and Schwert (1977)find that government bonds are __________ related to expected inflation and equities are __________ related to expected inflation.

Question 30

Given a dividend payout ratio of 0.75,a required rate of return of 14.37% and a growth rate of 6%,what is the price-earnings ratio?

Question 31

When modelling the industry earnings per share forecast,the main modelling problem lies in the prediction of:

Question 32

Assume a bond with a face value of $100 000 pays semi-annual coupons of 6% p.a.in perpetuity.This bond has a discount rate of 8% p.a.What is the price of the bond?

Question 33

Given a nominal interest rate of 6.75% and a real rate of return of 4%,what is the expected rate of inflation?

Question 34

The 'industry life cycle' refers to:

Question 35

Possible variables explaining the risk premium include:

Question 36

The nominal interest rate is 10%.The real interest rate is 4%.The inflation rate must be _________.

A)-6%
B)4%
C)5.77%
D)14.4%

Question 37

The two extra industry sectors provided for the Australian market above that in the typical GICS classification are:

Question 38

The growth models,ROE change and sales growth,are:

Question 39

Given an earnings per share figure for the All-Ordinaries of 357 and a price-earnings ratio of 18,what is the price of the All-Ordinaries?

Question 40

Mature growth is the __________ stage in the industry life cycle.