Deck 10: Macroanalysis and Microvaluation of the Stock Market

Question 1

All of the following factors affect the required rate of return except

A) the economy's risk free rate.
B) corporate business risk.
C) return on equity.
D) country risk.
E) expected rate of inflation.

Answer 1

C

Question 2

The dividend payout ratio, the required rate of return on common equity and the expected growth rate of stock dividends are the major variables that affect

A) the profit margin for the S&P Industrials Index.
B) the earnings multiplier for common stock.
C) aggregate tax revenues.
D) capital gains tax revenues.
E) aggregate GDP.

Answer 2

B

Question 3

A microeconomic estimate of the market earnings multiple requires an estimate for which of the following variables?

A) Dividend payout ratio
B) Return on equity
C) Real RFR
D) All of the above
E) None of the above

Answer 3

D

Question 4

An examination of the relationship between stock prices and the economy has shown that the relationship is

A) weak, and that stock prices turn after the economy does.
B) nonexistent.
C) strong, and that stock prices turn after the economy does.
D) strong, and that stock prices turn before the economy does.
E) weak, and that stock prices turn before the economy does.

Question 5

Which of the following statements concerning asset allocation is false?

A) Diversification across international boundaries can improve risk-adjusted portfolio returns.
B) Economies expected to grow at an above-average rate with above-average profit growth should be considered as candidates to overweight in a global portfolio.
C) Severe currency blockages should not impact global diversification selections.
D) Portfolio allocation among asset classes may provide higher portfolio returns while lowering portfolio risk levels.
E) None of the above (that is, all statements are true).

Question 6

Which of the following is not a determinant of the aggregate gross profit margin?

A) Unit labour costs of production
B) Rate of inflation
C) Unemployment rate
D) Level of foreign competition
E) Growth rate of M2 money supply

Question 7

Which of the following variables was considered not significant in explaining stock returns?

A) Industrial production
B) Changes in the risk premium
C) Consumption
D) Twists in the yield curve
E) Inflation

Question 8

If interest rates rise due to inflation, and expected cash flows to a firm rise, then you would expect stock prices to

A) rise.
B) rise and then decline.
C) remain unchanged.
D) decline.
E) none of the above.

Question 9

Which of the following is not a reason given for why forecasters are so often incorrect?

A) There is a temptation for economic forecasters to stay fairly close to the 'norm', that is, 'group think'.
B) Many analysts are simply too short-sighted.
C) Economists and economic forecasters often suffer from information overload.
D) Some economic forecasters are too broad-minded, trying to include a number of ideas in their forecasts.
E) None of the above (that is, all are reasons cited for why forecasters are often incorrect)

Question 10

The index of leading indicators includes all of the following, except:

A) M2 money supply.
B) S & P 500 index.
C) Orders for plant and equipment.
D) Changes in the sensitive materials price.
E) Index of industrial production.

Question 11

Jensen, Johnson, and Mercer showed that the relationship between stock returns and size and price-to-book ratio holds in periods when monetary policy is

A) neutral.
B) tight.
C) easy.
D) all of the above.
E) none of the above.

Question 12

You are attempting to estimate expected earnings per share for a major stock market series. You have determined an appropriate estimate for sales per share. Which of the following methods can be used to estimate the profit margin?

A) Base the estimate on recent trends of net profit margins.
B) Estimate the net before tax (NBT) profit margin along with a tax estimate.
C) Incorporate an estimate an operating profit margin, defined as earnings before interest, taxes and depreciation.
D) All of the above methods are appropriate.
E) None of the above methods are appropriate.

Question 13

If a diffusion index for new orders went from 87 to 74 and then to 68, it would indicate ____ receipt of new orders and indicate a ____ in breadth and the possibility of a future ____ in the series.

A) limited, strengthening, decline
B) limited, weakening, increase
C) widespread, strengthening, increase
D) widespread, weakening, decline
E) widespread, weakening, increase

Question 14

Expected earnings per share estimates require all of the following except

A) a sales per share estimate.
B) a GDP estimate.
C) an aggregate operating profit margin estimate
D) an estimate of the real risk-free rate.
E) a tax rate estimate.

Question 15

There are three techniques available to help an investor make a market decision. Which of the following is not such an analysis technique?

A) Macro techniques that are based on the strong relationship between the economy and security markets.
B) Micro techniques that estimate future market values by applying one of several basic valuation models to equity markets.
C) Technical analysis where an investor analyses past and recent market movements for indications of future performance.
D) Fundamental analysis that considers the effect of market on the entire portfolio.
E) None of the above (that is, all are techniques available to make market decisions).