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Inaccurately because the scope of GDP measurements can change. |
How accurately do GDP portray the economy and why? |
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It went down |
Consider the formula GDP = C+I+G+(X-M). A country is undergoing a boom in consumption of domestic and foreign luxury goods. In one year, the dollar growth in imports is greater than the dollar growth in domestic consumption. Assuming nothing else has changed, what happened to GDP? |
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C= Consumer spending |
what is the meaning of each letter in the GDP formula, C+I+G+(X-M). |
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Sweden performed better |
Here is the most important economic data for Australia and Sweden. which economy did better year-over-year (YOY) in the fourth quarter of 2013 compared to the fourth quarter of 2012? Use the two charts to investigate. |
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Consumer spending accounts for two-thirds of the U.S. economy when the number of unemployed consumers rises, there is less consumer spending. |
In the United States, why is there a strong correlation between unemployment and GDP? |
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The country has deflation. The bottom line is nominal growth and the top line is real growth. |
Here is a chart showing both nominal GDP growth and real GDP growth for a country. Which of the following can be a true statement at the time the chart was captured? |
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PMI |
Which of the following lines is the best leading economic indicator? |
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Nonfarm payrolls go down, the PMI indicator goes DOWN, the housing starts goes down. |
What typically happens to nonfarm payrolls, the PMI indicator, and housing starts at the onset of a recession in the United States? |
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Timeliness of release |
Which of the following qualities of economic indicators do investors prize the most? |
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Because GDP statistics are released well after other economic indicators. |
Why is the release of GDP statistics less interesting to investors than the release of other economic indicators? |
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GDP |
Which of the following important U.S. economic indicators is only available on a quarterly basis? |
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nonfarm payrolls |
Which economic indicator is most directly linked to unemployment? |
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To know when specific economic data points are a positive or negative surprise. |
What is the main reason that investment banks create estimates of economic indicators? |
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They do not consistently presage turning points. |
Which of the following is the biggest pitfall of economic indicators? |
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Japan |
Which country is the fourth biggest importer and exporter? |
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Hong Kong dollar against the U.S. dollar in 1997. |
Which of the following is not an example of a failed peg? |
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The currency strengthens. |
What generally happens when a central bank unexpectedly increases interest rates? |
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A surprise change in inflation expectations |
Which driver weakened the Swiss franc? |
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How currencies may be overvalued or undervalued. |
What does the Big Mac index show? |
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Surprise changes in interest rates, inflation, and trade. |
Which of the following are short-term drivers of currency valuation? |
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Global investors are attracted by higher bond yields in high interest rate countries. |
By what mechanism do interest rates affect currency values? |
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U.S. Stocks rally on Fed’s Surprise reduction of Interest Rate. |
Which of these headlines could move a currency pair? |
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2% |
What is the most common target inflation rate for an advanced economy? |
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To halt the vicious cycle of deflation |
What was the primary goal of Abenomics? |
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prices decline |
Here is the vicious deflationary cycle. What step connects the lower left gray arrow to the upper right blue arrow? |
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Inflation |
Were the two oil crises in the 1970s linked to deflation or inflation? |
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To respond quickly to changes in the currency markets. |
Why would Jack Welch suggest putting all company plants on barges? |
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Its storage costs |
Legendary investor Warren Buffett said, "Gold gets dug out of the ground….. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head." Based on this quotation, what quality of gold is he referring to? |
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By locking in forward rates for known foreign payments. |
Which of the following options is the best way for investors to manage currency risk? |
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U.S. government bonds are considered low risk. |
What quality of U.S. government bonds causes investors to buy them when market volatility rises? |
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Because the repayment amounts and timings are fixed for ordinary bonds. |
Why is fixed income called fixed income? |
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because it has the right to tax the wealthiest population on earth. |
Why does the United States have a strong reputation for creditworthiness. |
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To build liquid FX reserves |
What is one reason why foreign governments lend to the U.S. government? |
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Coupon repayment |
What does one yellow bar depict in this debt distribution diagram? |
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An investor who is about to buy bonds. |
Which one of the following actors benefits when interest rates go up? |
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Investors do not after the calculation |
When investors doubt the creditworthiness of a borrower, how do they alter their calculation of the bond yield to take into account these doubts? |
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There is no general rule. |
As a general rule, what percentage of debt to GDP will make a government’s bond yields spike? |
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Both countries are highly creditworthy. |
What is true of both the U.K. and the U.S.? |
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A 4% annual yield on a credit risk-free 10-year government bond from the mythical country of Utopia. |
Which would you prefer |
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A 5% annual yield on an investment in 10-year U.S. government bonds |
Which would you prefer? |
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The large government bond market competes for investors attention via yields |
What is the primary reason for U.S. government bond yields to ripple through the bond market? |
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Creditworthiness |
A rise in which of the following measures would typically send a government bond price up? |
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by comparing the yields of single bonds |
How do investors compare bonds? |
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wartime activities |
Which of the following is the strongest driver of inflation? |
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By compensating investors for inflation |
Investors who fear rising inflation may buy Treasury Inflation Protected Securities (TIPS). How do TIPS shield lenders from inflation? |
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Core PCE |
What is the Federal Reserve’s favorite inflation gauge? |
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To compensate leaders for the greater risk of long-term loans compared to short-term loans |
Why does the yield curve naturally slope upwards. |
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A tendency to expand the borrowing capacity of the company. |
What impact will a tightening of the corporate spread most likely have on a company? |
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Corporate impact, global impact, consumer impact. |
What are the three main transmission mechanisms by which the yield curve affects the economy? |
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A house |
The purchase of which of the following products is most affected by interest rates? |
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Central bank interest rates |
What is the primary driver of the left-hand end of the yield curve? |
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An inverted yield curve means that bond traders are predicting interest rate cuts, and interest rate cuts happen in response to a recession. |
Why does the yield curve tend to invert shortly before a recession? |
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IPOs incentivize entrepreneurs to innovate as IPOs provide a way for entrepreneurs to monetize their work. |
Why do companies do IPOs? |
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an IPO crystallizes the value of the manager-owners stake. |
Why do company manager-owners smile when they ring the stock exchange bell at their IPO? |
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Her mortgage payments and necessities are fixed. |
What is the prime reason that Jenny’s discretionary income is more volatile than her salary? |
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A shareholder in a booming economy. |
A wedding planning company has a high fixed-cost base and a lot of debt. Who would you rather be? |
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Due to the residual nature of earnings |
Why are equities volatile? |
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When you buy an equity, the most you can lose is 100% and your potential gain is unlimited. |
Which of the following statements is true? |
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Both are estimated in advance by analysts. |
What does the release of earnings announcements have in common with the release of economic indicators? |
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A comparison of the commercial prospects of new aircraft models |
Engines are the most expensive, heavy component on an aircraft and are designed with detailed specifications. Which of the following would likely be the best theme for a Rolls-Royce analyst research note to help a portfolio manager decide between investing in Rolls-Royce or United Technologies? |
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Median age of society |
You are building a financial model of a bifocal lens manufacturer. Which of the following is the best driver to use? |
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Defines the industry or industries in which the company operates. |
When an analyst is looking at a company for the first time, which of the following four activities does he do first? |
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There is not enough information to tell. |
Company X was expected to have earnings per share of $0.52 for the upcoming quarter. On the day of the results, the company reported earnings per share of $0.83. What happened to the share price when the stock market opened? |
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$100 million |
Widget Co has a market capitalization of $100 million. it does a 10-for-1 stock split. it then does a 1-for-16 reverse stock split. Finally, it does a 35-for-1 stock split. Nothing else changes. what’s the new market cap? |
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Short-term forecasts |
What input do both absolute valuation and relative valuation typically require? |
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Future profits are uncertain. |
What is a reason one discounts future cash flows as part of the absolute valuation process? |
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Enterprise value = market cap – cash + debt |
How is enterprise value calculated? |
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A fishery exceeding fishing quotas |
Which of the following assigns the same relative weightings to short-term and long-term outcomes as the absolute valuation process? |
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Earnings estimates |
A rise in which of the following inputs will increase an absolute valuation? |
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The cash flow from equities can continue indefinitely while the cash flow from most bonds comes to an end. |
how do earnings yields differ from bond yields? |
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The estimated growth can be dramatically wrong. |
What is one possible weakness of this peer approach to valuation? |
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A stock’s P/E ratio can remain above or below market average for extended periods. |
What may be a problem of comparing the P/E of a stock to the P/E of the overall market? |
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$50.00 |
If the earnings per share of a company is $1 and the earnings yield is 2%, What is the price per share? |
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