Deck 13: Economy Market Analysis

Question 1

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

Answer 1

D

Question 2

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

Answer 2

B

Question 3

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.

Answer 3

A

Question 4

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

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

Question 5

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 6

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 7

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 8

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

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

Question 9

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 10

In the U.S. ,since the end of World War II,the typical business cycle consists of an expansion of how many months?

A)10
B)23
C)35
D)57

Question 11

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.

Question 12

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

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

Question 13

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 14

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 15

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.

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

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.

Question 18

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 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

When interest rates fall,bond prices:

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

Question 21

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 22

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

Question 23

The longest peacetime expansion ran from 1991 to 2000.

Question 24

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 25

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 26

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 27

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 28

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 29

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

Question 30

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

Question 31

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 32

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 33

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

Question 34

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 35

The earnings yield,which is 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 36

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 37

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 38

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 39

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 40

Assume the dividend payout ratio on the S&P 500 is 40 percent when the rate on long-term T-bonds is 9 percent,and investors demand an equity risk premium of 8 percent.If the growth rate of dividends is expected to be 10 percent,what is the price of the market index if the earnings expectation is $30?

A)$384.00
B)$213.44
C)$266.56
D)$171.43
Solution:D₁= 0.40($30)= $12
K= 0.09 + 0.08 = 0.17
P₀= D₁/(k - g)
= 12/(0.17 - 0.10)= $171.43

Question 41

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

Question 42

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

Question 43

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

Question 44

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

Question 45

Why do stock investors pay attention to the bond market?

Question 46

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

Question 47

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

Question 48

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

Question 49

Approaches to assessing the stock market's likely direction include application of the ________________ model,also called the Fed model.

Question 50

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 51

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

Question 52

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

Question 53

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

Question 54

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 55

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

Question 56

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

Question 57

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

Question 58

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

Question 59

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

Question 60

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

Question 61

According to Warren Buffett,the two critical economic variables are: _______________ and _________________.

Question 62

What are the implications of the article "Overcoming the Bear Market Blues" for investors?

Question 63

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