Download File ch13 Chapter 13 Economy / Market Analysis Type: Multiple

File ch13.rtf Chapter 13 Economy / Market Analysis
Type: Multiple Choice
1.
a)
b)
c)
d)
Which of the following statements about the economy and market is most correct?
Informed investors can consistently forecast the stock market.
Buy-and-hold investors need to buy only before major market upturns.
Short- and medium-term investors need to consider the market’s likely direction.
Most investors cannot even identify trends in the economy or markets.
Ans: C
EASY
Response: Section: Assessing the Economy.
2. Which of the following is NOT an argument for considering stocks issued outside the U.S.?
a) U.S. based equities are less than half the total of equities available.
b) The strength of foreign currencies, including the euro, can reward investors in foreign stocks.
c) New technologies and de-regulation are coming to foreign markets, as well as the U.S.
d) Economic, legal and cultural institutions are the same in all countries that have stock markets.
Ans: D
EASY
Response: Section: Taking a Global Perspective.
3.
What use can investors make of GDP statistics?
a) Slow GDP growth means slow corporate revenues, which means lower profits.
b) GDP is the basic measure of economic activity in the country.
c) GDP statistics are subject to a least two revisions.
d) EMH states that GDP statistics have no effect of stock prices.
Ans: A
EASY
Response: Section: Assessing the Economy.
What is the definition of a “recession”?
4.
a) The bottom of an economic cycle.
b) The period from a peak to the trough of a cycle.
c) The top of an economic cycle.
d) The period from a trough to a peak of a cycle.
Ans: B
EASY
Response: Section: Assessing the Economy.
5.
Raphael wants to identify when the currently weak economy will start to pick up, so he can
invest in growth stocks. Which of the following economic indicators should Raphael focus on?
a)
a)
b)
c)
index of consumer expectations
industrial production
duration of unemployment
commercial loans outstanding
Ans: A
MEDIUM
Response: Industrial production is a concurrent indicator, and duration of unemployment is a
lagging indicator. Commercial and industrial loans are lagging indicators. Section: The Stock
Market and the Economy.
6.
Which of the following is NOT a typical reason for economic expansions to end?
a) The Fed raises interest rates to fight inflation.
b) An external shock, such as a sudden increase in the price of oil.
c) A financial crash following a speculative bubble.
d) An increase in unemployment
Ans: D
MEDIUM
Response: Unemployment increases during a contraction, but with a log. See page 13-7.
Section: Assessing the Economy.
7.
Which of the following is NOT a persuasive argument for using the state of the economy as a
means to forecast stock market moves?
a) The stock market and the overall economy are strongly related.
b) When the economy is doing well, companies are making profits, which lead to higher stock
prices.
c) The stock market is a leading economic indicator.
d) When the economy is weak, investors require a higher rate of return, lowering stock prices.
Ans: C
EASY
Response: Section: The Stock Market and the Economy.
8.
Which of the following does NOT suggest why stock investors pay attention to interest rates?
a) Bond markets react directly to interest rate movements.
b) A steep yield curve suggests the economy is picking up.
c) Warren Buffet, a very successful investor, has identified corporate profits and interest rates
as the two critical variables.
d) If monetary policy, run by the Federal Reserve, is expansionary, business should pick up,
increasing profits.
Ans: A
EASY
Response: Interest rates are more closely related to bonds than to stocks. Section: The Stock
Market and the Economy.
9.
What is the role of Federal Reserve, and its new Chairman, Ben Bernanke?
a) The Fed attempts to prevent excessive stock speculation.
b) The Fed changes Fed Funds rates from time to time, attempting to control inflation.
c) The Fed calculates the Consumer Price Index (CPI).
d) The Fed controls unemployment through changes in the minimum wage.
Ans: B
MEDIUM
Response: Section: Assessing the Economy.
10.
Which of the following statements concerning the shape of the yield curve is most correct?
a) A flat yield curve is associated with an accelerating economy.
b) A steeply upward sloping yield curve is associated with an accelerating economy.
c) An inverted yield curve signals an accelerating economy.
d) Low, upward sloping yield curves appear at the peak of the cycle.
Ans: B
HARD
Response: A flat yield curve means the economy is slowing. An inverted yield curve has
preceded every recession since World War II. A low, upward sloping yield curve appears in the
early stages of an expansion. Section: Assessing the Economy
11.
Which of the following is NOT included in the suggested sources of economic information?
a) Messages from the Chairman of the Federal Reserve
b) Observation of the shape and height of the yield curve
c) Publications from reliable economic forecasters.
d) The economic forecasts included in annual reports of the company under consideration
Ans: D
MEDIUM
Response: The company’s information may include “wishful thinking.” Section: The Stock
Market and the Economy.
12.
Which of the following is NOT a reason that investors place so much emphasis on the major
market indexes?
a) Performance of the major indexes has no correlation with that of individual stocks.
b) Many investors want to compare US stocks versus foreign stocks
c) Many investors want to compare the performance of their stocks versus some benchmark.
d) The vast majority of stocks will follow the general direction of the major indexes.
Ans: A
EASY
Response: Section: Understanding the Stock Market.
13.
Which of the following is NOT needed to value the stocks in an overall market index?
a) Choose which index is most appropriate.
b) Estimate the appropriate multiplier.
c) Estimate expected real corporate earnings.
d) Estimate the stock price of each stock in the index.
Ans: D
EASY
Response: Section: Understanding the Stock Market.
14.
Why is the P/E ratio important in estimating the value of stocks in the index?
a) P/E ratio is more volatile, thus harder to predict, than earnings.
b) The P/E ratio is multiplied by the earnings estimate to estimate the value.
c) The P/E ratio is the price per share divided by the earnings per share.
d) The P/E ratio is a popular way of comparing the value of stocks with quite different prices.
Ans: B
EASY
Response: Section: Understanding the Stock Market.
15.
What may cause the P/E ratio of the market as a whole to rise and fall over time?
a)
b)
c)
d)
P/E ratios tend to be high when interest rates are low, and the reverse.
High P/E ratios generally indicated strong growth prospects for the company.
P/E ratios are published by The Securities and Exchange Commission.
Earnings, and prospects for future earnings change over time.
Ans: A
MEDIUM
Response: Section: Understanding the Stock Market.
16.
Warren Buffet has identified two variables which he claims are critical in forecasting longterm movements in stock prices. Which of the following includes the two variables Buffet
identified?
a)
b)
c)
d)
Interest rates and GDP growth
Interest rates and expected corporate profits
GDP growth and expected corporate profits
Interest rates and published corporate profits
Ans: B
EASY
Response: Section: Making Market Forecasts.
17. Which of the following is a reasonable explanation of why interest rates are inversely
related to stock prices?
a) Stock prices are set by bankers, who also set interest rates.
b) Company profits will decline when interest rates are high.
c) Stock prices are based on the discounted flow of dividends or cash flow; a higher interest rate
increases the discount.
d) Interest rates are neither positively nor negatively related to stock prices.
Ans: C
EASY
Response: Section: Making Market Forecasts..
18.
Stock prices are considered one of the leading indicators. How can investors use this
relationship to help forecast cyclical changes in stock prices?
a) Because stock prices rise or fall before a recovery or recession, economic cycles cannot be
used to forecast stock prices.
b) The investor must be able to forecast the economic turning points well in advance.
c) The investor can profit by investing at the top of the economic cycle.
d) The investor should reduce investments at the bottom of the economic cycle.
Ans: B
MEDIUM
Response: Section: Making Market Forecasts.
19. Which of the following is NOT accurate regarding Earnings Yield, the E/P Ratio?
a) The E/P ratio is the 12 month forward operating earnings for the S&P 500, divided by the
S&P Index.
b) The E/P ratio is the inverse of the P/E ratio.
c) The E/P ratio is a yield, which can be compared to the 10 year Treasury yield.
d) Divide the estimated earnings by the E/P ratio to compare with the 10 year Treasury yield.
Ans: D
MEDIUM
Response: Section: Making Market Forecasts.
20. Which macroeconomic variable is most closely associated with increases in corporate
earnings in the long run, and thus to the value of the stocks in the index?
a) Inflation
b) Gross Domestic Product (GDP)
c) Unemployment
d) Interest rates
Ans: B
EASY
Response: Section: Making Market Forecasts.
Type: True False
1. The “top-down” style of fundamental security analysis starts with analysis of the specific
company, then moves to the industry, then to the economy.
Ans: False
Response: The top-down approach starts with the economy, then works down to smaller and
smaller units. Section: Understanding the Stock Market.
2. The business cycles of the developed countries are becoming more closely synchronized.
Ans: True
Response: Trade and investments flows are bringing these countries more closely together.
Section: Taking a Global Perspective.
3. Over the last 30 plus years, the P/E ratio for the S&P 500 has typically ranged from 7 to 22.
Ans: True
Response: Section: Making Market Forecasts.
4. Most individual investors follow the Dow Jones Industrial Average, and most professionals
follow the S&P 500 Index.
Ans: True
Response: Section: Understanding the Stock Market.
5. The P/E ratio can be used to evaluate the level of market indexes, as well as individual
stocks.
Ans: True
Response: Section: The Stock Market and the Economy.
6. Market P/E ratios are generally high when interest rates and inflation are high.
Ans: False
Response: Section: Understanding the Stock Market.
7. Examine Table 13-1. It is apparent from this table that higher interest rates are associated
with lower return on the S&P 500.
Ans: False
Response: While most years with lower interest rates had higher returns, there are some major
exceptions. Section: Making Market Forecasts.
8. Stock prices generally peak at the top of a business cycle.
Ans: False
Response: Movements in stock prices precede business cycle movements. Section: Making
Market Forecasts.
9. The E/P ratio, the inverse of the P/E ratio, can be compared to the yield on the 10-year
Treasury Bond to determine if the overall market is over or under-priced.
Ans: True
Response: Section: Making Market Forecasts.
10. Analysis over long periods indicates that catching the major bull movements is much more
important than avoiding the major bear movement. This is an argument for “buy and hold.”
Ans: True
Response: Section: Making Market Forecasts.