2019 CFA level 3 qbank r 16 17 capital market expectations equity market val answers

10/12/2018 Learning Management System Question #1 of 99 Which of the following is consistent with a at yield curve? A) Monetary policy is expansive while scal policy is restrictive B) Monetary policy is restrictive while scal policy is expansive C) Monetary policy is restrictive and scal policy is restrictive Explanation in If monetary policy is restrictive while scal policy is expansive, the yield curve will be at (Study Session 8, Module 16.5, LOS 16.i) en tre Related Material Question #2 of 99 bo ok c SchweserNotes - Book Which of the following would be consistent with Country A having higher real interest rates m than Country B? o A) Country A has a looser monetary policy and a faster growing economy B) Country A has a tighter monetary policy and a slower growing economy w w C) Country A has a tighter monetary policy and a faster growing economy Explanation w Countries with a tighter monetary policy and stronger economic growth will see higher currency values In fact, in the early 1980s, the U.S had high real and nominal interest rates due to a tight monetary policy, robust economy, and an increasing budget de cit This resulted in a higher value for the dollar (Study Session 8, Module 16.7, LOS 16.l) Related Material SchweserNotes - Book Question #3 of 99 https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83450049/print 1/61 10/12/2018 Learning Management System During which phase of the business cycle would TIPS be least useful to a portfolio manager? A) Slowdown B) Initial recovery C) Early expansion Explanation U.S Treasury In ation Protected Securities (TIPS) are protected against increases in in ation They would be needed the least when in ation is falling During the initial recovery phase of the business cycle, in ation is falling (Study Session 8, Module 16.10, LOS 16.r) in Related Material en tre SchweserNotes - Book bo ok c Question #4 of 99 The following table re ects economic data for Market Q: 1.0% Expected growth in the labor 2.0% m Expected growth in total factor productivity 1.2% o Expected growth in capital stock, α = 0.4 Using the Cobb-Douglas production function and the data provided, the expected growth w A) 2.7% w w (percentage change) in real economic output for Market Q is closest to: B) 3.2% C) 3.0% Explanation %ΔY = %ΔA + α(%ΔK) + (1 − α)(%ΔL) = 1.0% + 0.4(1.2%) + 0.6(2.0%) = 2.68% (Study Session 8, Module 17.1, LOS 17.a) Related Material SchweserNotes - Book https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83450049/print 2/61 10/12/2018 Learning Management System Question #5 of 99 Which of the following is NOT a characteristic of economic indicators as used in economic forecasting? Economic indicators: A) are di cult to understand and interpret B) can be adapted for speci c purposes C) have an e ectiveness that has been veri ed by academic research Explanation Economic indicators are actually easy to understand and interpret .in (Study Session 8, Module 16.8, LOS 16.n) en tre Related Material Question #6 of 99 bo ok c SchweserNotes - Book Which phase of the business cycle is characterized by rising stock prices but increased investor nervousness? w w C) Slowdown .o B) Initial recovery m A) Late expansion Explanation w The late expansion phase of the business cycle is characterized by high dence and employment, increases in in ation, rising bond yields, and rising stock prices Investor nervousness increases risk during this period The central bank also limits the growth of the money supply (Study Session 8, Module 16.4, LOS 16.f) Related Material SchweserNotes - Book Question #7 of 99 https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83450049/print 3/61 10/12/2018 Learning Management System Of the following investment strategies, which one would bene t most from a bottom-up forecasting approach in predicting equity returns? A) Allocating invested funds across various markets B) Buying and selling individual securities to capture short-term pricing ine ciency C) A macro hedge fund manager allocating funds among currency markets Explanation In a bottom-up forecasting approach, the analyst rst takes a microeconomic perspective by focusing on the fundamentals of individual rms indicative of buying and selling individual securities to capture short-term pricing ine ciency (Study Session 8, Module 17.3, LOS 17.e) SchweserNotes - Book m Question #8 of 99 bo ok c Related Material en tre in In a top-down forecasting approach, the analyst utilizes macroeconomic factors (e.g., interest rate expectations, expected growth in GDP) to estimate the performance of market-wide indicators, such as the S&P 500 Successive steps include identifying sectors in the market that will perform best given market expectations .o Which of the following is NOT an input to the Taylor rule? w w A) The expected GDP B) The discount rate w C) The neutral rate Explanation The Taylor rule determines the target interest rate using the neutral rate, expected GDP relative to its long-term trend, and expected in ation relative to its targeted amount (Study Session 8, Module 16.5, LOS 16.h) Related Material SchweserNotes - Book Question #9 of 99 https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83450049/print 4/61 10/12/2018 Learning Management System Which of the following statements regarding spending and the business cycle is least accurate? A) The inventory cycle is shorter than the business cycle B) As a percentage of GDP, consumer spending is much larger than business spending C) Business spending is less volatile than consumer spending Explanation in Business spending is more volatile than consumer spending Spending by businesses on inventory and investments are quite volatile over the business cycle As a percentage of GDP, consumer spending is much larger than business spending The inventory cycle typically lasts two to four years whereas the business cycle has a typical duration of nine to eleven years (Study Session 8, Module 16.4, LOS 16.g) en tre Related Material Question #10 of 99 bo ok c SchweserNotes - Book Last dividend (D0) m The following data pertains to an equity market index 100 300 Current and sustainable long-term growth rate 2.5% Required return 7.5% Yield on 10-year government bond 6.0% w w w o Forecast earnings per share Using the data in the table, the intrinsic price level of the equity market index is closest to: A) 2,000.00 B) 2,929.00 C) 2,050.00 Explanation https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83450049/print 5/61 10/12/2018 Learning Management System We are provided with a constant rate of growth, so we can use the constant growth dividend discount model for equity valuation: D0 (1 + g) D1 P0  =  r−g  =  r−g 100(1.025)  =  0.075−0.025  =  102.50 0.05  = 2,050 (Study Session 8, Module 17.2, LOS 17.c) Related Material SchweserNotes - Book in Question #11 of 99 en tre Which of the following is consistent with a likely weak economy in the future? A) Monetary policy is expansive and scal policy is expansive B) Monetary policy is restrictive while scal policy is expansive bo ok c C) Monetary policy is restrictive and scal policy is restrictive Explanation m When both scal and monetary policies are restrictive, the yield curve is downward sloping (i.e., it is inverted as short-term rates are higher than long-term rates), and the economy is likely to contract in the future Related Material o (Study Session 8, Module 16.5, LOS 16.i) w w w SchweserNotes - Book Question #12 of 99 Which of the following is most representative of an exogenous economic shock? A) Ongoing expansionary scal policy by the federal government leading to higher in ation and interest rates B) A hurricane hitting the Gulf of Mexico resulting in the shut-down of many oil wells and re neries and to higher oil prices C) Anticipated loose monetary policy by a country’s central bank leading to in ation and to depreciation in the country’s currency https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83450049/print 6/61 10/12/2018 Learning Management System Explanation An exogenous shock is something that occurs outside the normal course of an economy, such as a natural disaster or unanticipated government policy The shock is unanticipated and is not part of a trend as would be characterized by ongoing monetary or scal policy (Study Session 8, Module 16, LOS 16.k) Related Material SchweserNotes - Book in Question #13 of 99 en tre Which of the following statements regarding emerging market government debt is most accurate? Emerging market government debt is usually denominated in: A) a non-domestic currency which makes them less credit risky bo ok c B) a non-domestic currency which makes them more credit risky C) the domestic currency which makes them more credit risky Explanation o m The key di erence between developed country government bonds and emerging market government bonds is that most emerging debt is denominated in a non-domestic currency (e.g., dollars, euros, etc.) The emerging government must obtain a hard currency to pay back the principal and interest The default risk for emerging market debt is thus much higher (Study Session 8, Module 16.8, LOS 16.o) w w Related Material w SchweserNotes - Book Question #14 of 99 Which of the following statements regarding Tobin's q and the equity q is least accurate? A) The equilibrium value for both Tobin’s q and the equity q is B) Tobin’s q compares the current market value of a company to the replacement cost of its assets C) The equity q compares the aggregate market value of the rm’s equity to the market value of the rm’s net worth https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83450049/print 7/61 10/12/2018 Learning Management System Explanation The equilibrium value of both Tobin's q and the equity q is assumed to be 1.0 Tobin's q compares the current market value of a company to the replacement cost of its assets The thinking is that the sum of the replacement values of the individual assets should be the same as their aggregate market value, as re ected in the sum of the market values of the rm's debt and equity The theoretical value of Tobin's q is 1.0 If the current Tobin's q is above (below) 1.0 the rm's stock is presumed to be overpriced (underpriced) The equity q focuses directly on equity values and is interpreted the same way as Tobin's Q It compares the aggregate market value of the rm's equity to the net worth at replacement value, not market value That is the reason the statement is false The replacement value is measured as replacement value of assets less market value of liabilities .in (Study Session 8, Module 17.4, 17.5, 17.6, 17.7, LOS 17.f) Related Material bo ok c Question #15 of 99 en tre SchweserNotes - Book Which of the following is NOT indicative of low risk in an emerging market economy? A) Foreign exchange reserves are twice that of the short-term debt m B) A foreign debt level that is 75% of GDP w w Explanation o C) A current account de cit that is 2% of GDP w Foreign debt levels greater than 50% of GDP indicate that the country may be overlevered Debt levels greater than 200% of the current account receipts also indicate high risk Current account de cits (roughly speaking, imports are greater than exports) greater than 4% of GDP can be problematic because the de cit must be nanced through external borrowing High risk is also indicated when foreign exchange reserves are less than the short-term debt that must be paid o in one year (Study Session 8, Module 16.7, LOS 16.m) Related Material SchweserNotes - Book Question #16 of 99 https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83450049/print 8/61 10/12/2018 Learning Management System If in ation rises, the yields for TIPS will: A) rise and their price will fall B) fall and their price will rise C) rise and their price will rise Explanation If in ation starts rising, the yields for U.S Treasury In ation Protected Securities (TIPS) will actually fall and their prices will rise because the demand for them increases as investors seek out their in ation protection (Study Session 8, Module 16.8, LOS 16.p) in Related Material en tre SchweserNotes - Book bo ok c Question #17 of 99 An equity market's forecasted EPS is 15.30 Assuming a required real return on equity of 8%, a current dividend of 10, current supernormal growth of 9.5%, a long-term sustainable rate of growth of 2.0%, and a 20-year period of linear growth decline, the estimated forward price- m earnings ratio (P0/E1) of the market is closest to: o A) 15.4 C) 23.1 w w B) 19.3 w Explanation With the data provided, we use the H-model for equity valuation to solve for the intrinsic value of the index: D0 P0  =  =  r−gL (1 + gL )  +  [ 10 0.08−0.02 (1.02)  +  [ = 166.67 [1.02 + 0.75]  = 295.01⇒ N 20 P0 E / (gS − gL ) ] (0.095 − 0.02) ]  =  295.01/15.30  = 19.28 (Study Session 8, Module 17.2, LOS 17.c) Related Material SchweserNotes - Book https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83450049/print 9/61 10/12/2018 Learning Management System Question #18 of 99 Given an S&P 500 forward earnings yield of 7.2% and 10-year Treasury notes yielding 2.68%, which of the following interpretations of this data using the Fed model is most accurate? A) The spread between the S&P 500 earnings yield and the Treasury notes is too great to make an informed decision B) Since the S&P 500 is earning signi cantly more than the Treasuries this indicates the S&P 500 equity market is overvalued en tre are undervalued and should increase in value .in C) The S&P 500 earnings yield is higher than the Treasury yield indicating that equities Explanation bo ok c The Fed model assumes that the expected operating earnings yield on the S&P 500 (i.e., expected aggregate operating earnings divided by the current index level) should be the same as the yield on long-term U.S Treasuries: S&P earnings yield Fed model ratio =  Treasury yield m If the S&P 500 earnings yield is higher than the treasury yield, the interpretation is that the index value is too low relative to earnings Equities are undervalued and should increase in value Related Material o (Study Session 8, Module 17.4, 17.5, 17.6, 17.12, LOS 17.g) w w w SchweserNotes - Book Question #19 of 99 A top-down forecast of earnings per share for an equity market index is best described as: A) using macroeconomic factors to estimate the performance of market-wide indicators B) taking a microeconomic perspective by focusing on the fundamentals of individual rms C) looking at an individual rm’s product development relative to the rest of the industry https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83450049/print 10/61 10/12/2018 Learning Management System For practice, we calculate the expected returns for both markets First, we calculate the equity risk premium for both markets assuming full integration Note that for the emerging market, the illiquidity risk premium is added in: ERP M ERPi = ρi,M σi σM ( ) ERPA = 0.86(0.18)0.29 = 4.49% ERPB = 0.61(0.27)0.29 + 0.0250 = 7.28% Next, we calculate the equity risk premium for both markets assuming full segmentation: ERP M ERPi = σi ( σM ) in ERPA = (0.18)0.29 = 5.22% ERPB = (0.27)0.29 + 0.0250 = 10.33% en tre We then weight the integrated and segmented risk premiums by the degree of integration and segmentation in each market: ERPA = (0.80 × 0.0449) + ((1 − 0.80) × 0.0522) = 4.64% ERPB = (0.65 × 0.0728) + ((1 − 0.65) × 0.1033) = 8.35% bo ok c The expected return in each market gures in the risk-free rate: E(R)A = 4% + 4.64% = 8.64% E(R)B = 4% + 8.35% = 12.35% Related Material w w o SchweserNotes - Book m (Study Session 8, Module 16.2, LOS 16.c) w Question #76 of 99 Which of the following regarding the formulation of capital market expectations is least accurate? An analyst should: A) consider the investor’s tax status, allowable asset classes, and time horizon B) investigate assets’ historical performance and their determinants C) vary their assumptions when interpreting data and drawing conclusions Explanation https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83450049/print 47/61 10/12/2018 Learning Management System In the fth step of the formulation of capital market expectations, the analyst should use a consistent set of assumptions when interpreting data and drawing conclusions (Study Session 8, Module 16.1, LOS 16.a) Related Material SchweserNotes - Book Question #77 of 99 Suppose the analyst estimates a 1.8% dividend yield, long-term in ation of 3.4%, real earnings in growth of 5.0%, an increase in shares outstanding of 0.6%, and a P/E repricing of 0.2% What en tre would be the expected return on the stock market? A) 11.0% B) 9.8% bo ok c C) 8.6% Explanation The expected return on the stock market is 1.8% + 3.4% + 5.0% - 0.6% + 0.2% = 9.8% Related Material w w o SchweserNotes - Book m (Study Session 8, Module 16.2, LOS 16.c) w Question #78 of 99 The Cobb-Douglas production function (CD) uses the country's labor input and capital stock in order to estimate: A) total real economic output B) total factor productivity (TFP) C) total output elasticity Explanation https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83450049/print 48/61 10/12/2018 Learning Management System The Cobb-Douglas production function seeks to estimate the total real economic output by using the country's labor input and capital stock Along with these two items, total factor productivity and the output elasticity for both labor input and capital stock is used to help calculate the total real economic output (Study Session 8, Module 17.1, LOS 17.a) Related Material SchweserNotes - Book in Question #79 of 99 en tre Which of the following is least likely to be a bias in the top-down analysis model? A) Econometric models may be slow in capturing changes in individual factors B) Individual managers tend to be more optimistic than is warranted by the model bo ok c C) Models may be incorrectly speci ed using the wrong variables Explanation o m Individual managers being overly optimistic is a bias in the bottom-up approach Individual managers tend to be overly optimistic about their rm's future thus aggregating individual manager expectations can lead to signi cantly over estimating industry expectations Biases found in the top-down approach can occur when models are sometimes slow in capturing structural changes to the individual factors used in the model since historical data is used Also, the models may be incorrectly speci ed since the variables used in the past may no longer be appropriate w w (Study Session 8, Module 17.3, LOS 17.e) Related Material w SchweserNotes - Book Question #80 of 99 Given a current P/10-year MA(E) of 18.35 and an historical mean of 16.3, which of the following statements is the most accurate interpretation of this data? A) The market is under-valued and will revert back to the historical mean of 16.3 B) The market is over-valued and will revert back to the historical mean of 16.3 https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83450049/print 49/61 10/12/2018 Learning Management System C) The earnings would need to be adjusted to re ect "real earnings" before an interpretation could be made Explanation In the 10-year moving average price/earnings ratio, P/10-year MA(E), the numerator is the value of the S&P 500 price index, and the denominator is the average of the previous ten years' reported earnings Both are adjusted for in ation using the consumer price index Similar to a trailing P/E ratio, the P/10-year MA(E) compares the in ation adjusted price of the market at a point in time to the market's average real earnings over the previous ten years en tre (Study Session 8, Module 17.4, 17.5, 17.6, 17.11, LOS 17.g) in To use the P/10-year MA(E) the analyst compares its current value to its historical average to determine whether the market is over- or under-priced If the current ratio is greater than the historical average, the current price (i.e., level of the index) is high relative to earnings The index would be considered over-priced and would be expected to revert to its historical mean Related Material bo ok c SchweserNotes - Book Greg Wright, CFA, and Phil Bishop, CFA, are analysts and market forecasters for Far Horizons Forecasting, Inc or FHF They use a variety of data in their analysis, and Wright and Bishop have found it cost e ective to use publicly available data from the Bureau of Labor Statistics as well m as market data such as the yields of xed income instruments of various maturities Wright and Bishop have found in ation to be one of the most important inputs They include o the new announcement each quarter as it is released for the current quarter Wright has w w insisted on using each new announcement for the current quarter His goal is to avoid biases associated with placing too much weight on earlier information received and to allow their opinions to vary from previous opinions However, Bishop has insisted that when in ation w announcements deviate too far from the recent past, which in turn leads to a new capital market expectation very di erent from the recent observations, then they should revise the forecast to one closer to the recent average A coworker, Cindy Post, CFA, recently cautioned Wright and Bishop concerning how in ation announcements must be used with caution She says that the composition of the index, i.e., the items included in the index, can change over time Daniel Paddington, CFA, also cautioned that the method of calculating the index can change over time, too Post and Paddington caution that any forecasting model that does not account for these factors can lead to misleading results Post and Paddington have been o ering advice concerning other matters Post sees that Wright and Bishop have not been including beta analysis in their capital market expectations Post says https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83450049/print 50/61 10/12/2018 Learning Management System that beta research is appropriate for capital market expectations because this research relates to systematic risk, which a ects the whole market In forming capital market expectations, Paddington feels they should also begin using alpha research, which addresses the movement of prices of assets within classes The movements of short-term interest rates and bond yields as well as trends in the aggregate inventory-to-sales ratio are among the other inputs that Wright and Bishop already use in forming their capital market expectations This is public data that Wright and Bishop nd helpful in determining the present state of the economy Currently they are observing that the rates on both Treasury bills and long-term Treasury bonds are increasing Wright and Bishop good sign for business activity, but Bishop is pessimistic .in also observe that the aggregate inventory-to-sales ratio is decreasing Wright feels this is a en tre Wright and Bishop have recently tried to build models for forecasting exchange rates They have considered the various approaches: purchasing power parity, relative economic strength, capital ows and savings-investment imbalances They have decided to combine purchasing Question #81 of 99 bo ok c power parity and relative economic strength for a more complete theory Wright's insistence that the newest in ation forecast be included in the model and Bishop's m insistence to adjust extreme forecasts are examples of: respectively .o A) falling into the anchoring trap while attempting to avoid the status quo trap, w w B) attempting to avoid the anchoring trap but a possibility of falling into the status quo trap, respectively w C) attempting to avoid both the anchoring trap and the status quo trap Explanation Wright wants to avoid the anchoring trap, which occurs when an analyst places too much weight on earlier information and the associated expectation Bishop wanting to not let forecasts deviate too far from the recent past is a good example of the status quo trap (Study Session 8, Module 16.1, LOS 16.b) Related Material SchweserNotes - Book https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83450049/print 51/61 10/12/2018 Learning Management System Question #82 of 99 With respect to the cautionary notes concerning in ation announcements given by Post and Paddington: A) both are incorrect B) both are correct C) Post is correct and Paddington is incorrect Explanation (Study Session 8, Module 16.1, LOS 16.b) Related Material Question #83 of 99 bo ok c SchweserNotes - Book en tre in Post is pointing out the practice known as rebasing, which is the changing of an index to make sure the index truly re ects the current situation In the case of the Consumer Price Index, for example, the goods must change to re ect changing consumer buying habits In ation indexes also change the weights or calculation methods over time m Based on Wright and Bishop's observation concerning short-term and long-term rates, they w w A) a recession .o should assess that the economy is in: B) a late expansion w C) an early expansion Explanation Both short-term and long-term rates increase in an expansion (Study Session 8, Module 16.1, LOS 16.b) Related Material SchweserNotes - Book Question #84 of 99 https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83450049/print 52/61 10/12/2018 Learning Management System With respect to the advice that Post and Paddington o er concerning the use of beta research and alpha research, respectively, in the forming of capital market expectations: A) Post is correct and Paddington is incorrect B) Post is incorrect and Paddington is correct C) both Post and Paddington are correct Explanation The de nitions are correct, and alpha research does focus on individual assets, but that is why Paddington is incorrect Alpha is generally not included in models of capital market expectations .in (Study Session 8, Module 16.1, LOS 16.b) Related Material bo ok c Question #85 of 99 en tre SchweserNotes - Book There is a traditional interpretation to changes in the aggregate inventory-to-sales ratio With respect to the mentioned trend in the aggregate inventory-to-sales ratio and the reaction by m Wright and Bishop, we would most likely say: o A) that Wright is using the traditional interpretation and Bishop is not B) both Wright and Bishop are using di erent versions of the traditional w w interpretation w C) that Bishop is using the traditional interpretation and Wright is not Explanation The traditional interpretation is that a decreasing inventory-to-sales ratio is a negative sign because businesses are preparing for a decrease in business, and this is congruous with Bishop's pessimism Wright's optimism is probably from a new view that rms have been able to lower their levels of inventory with the help of technology (Study Session 8, Module 16.1, LOS 16.b) Related Material SchweserNotes - Book https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83450049/print 53/61 10/12/2018 Learning Management System Question #86 of 99 With respect to forecasting exchange rates, combining purchasing power parity (PPP) and relative economic strength for a more complete theory is: A) appropriate because purchasing power parity pertains to long-run equilibrium and relative economic strength adjusts to short-term announcements B) appropriate because purchasing power parity pertains to short-run announcements and relative economic strength adjusts to long-run equilibrium C) not appropriate because both purchasing power parity and relative economic in strength are long-term forecasting tools Explanation bo ok c (Study Session 8, Module 16.1, LOS 16.b) en tre It can be helpful to combine the PPP and relative strength approaches The relative strength approach indicates the response to news on the economy but does not tell us anything about the level of exchange rates The PPP approach indicates what level of the exchange rate can be regarded as a long-term equilibrium By combining the two, we can generate a more complete theory Related Material m SchweserNotes - Book w w o Question #87 of 99 Which of the following would indicate that a country is less a ected by global events? The w country is: A) small and has a diversi ed economy B) small and has an undiversi ed economy C) large and has a diversi ed economy Explanation Larger countries with diverse economies are less a ected by events in other countries Small countries with undiversi ed economies are more susceptible to global events (Study Session 8, Module 16.7, LOS 16.l) Related Material SchweserNotes - Book https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83450049/print 54/61 10/12/2018 Learning Management System Question #88 of 99 Which of the following statements regarding interest rates and yields is most accurate? A) Short-term rates are independent of the yields on long-term bonds B) An increase in short-term rates increases the yields on long-term bonds C) An increase in short-term rates may increase or decrease the yields on long-term bonds .in Explanation (Study Session 8, Module 16.8, LOS 16.o) Related Material m Question #89 of 99 bo ok c SchweserNotes - Book en tre A change in short-term rates has unpredictable e ects Usually an increase in short-term rates increases the yields on bonds Bond yields may actually fall though if the interest rate increase is su cient to slow the economy .o Which of the following would indicate the greatest stimulation of economic growth? w w A) Tax receipts increase due to changes in the economy B) Tax receipts increase due to a new government policy w C) Tax receipts decline due to a new government policy Explanation Only changes in the de cit directed by government policy will in uence growth A tax cut, which would result in lower tax receipts over the short-term, would stimulate the economy Changes in the de cit that occur naturally over the course of the business cycle are not stimulative or restrictive In an expanding economy, de cits will decline because tax receipts increase and disbursements to the unemployed decrease The opposite occurs during a recession (Study Session 8, Module 16.4, LOS 16.e) Related Material SchweserNotes - Book https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83450049/print 55/61 10/12/2018 Learning Management System Question #90 of 99 In the early expansion phase of the business cycle stock prices are: A) stagnant as they are in the later stages of an expansion B) rising at a faster rate than they are in the later stages of an expansion C) rising at a slower rate than they are in the later stages of an expansion Explanation (Study Session 8, Module 16.8, LOS 16.p) SchweserNotes - Book m Question #91 of 99 bo ok c Related Material en tre in In the early expansion phase of the business cycle, stock prices are increasing This is due to the fact that sales are increasing but inputs costs will be fairly stable Labor will not ask for wage increases because unemployment is still high Idle plant and equipment will be pushed into service at little cost Furthermore, rms usually emerge from recession leaner because they have shed their wasteful projects and excessive spending Later on in the expansion, the growth in earnings and stock returns slows because input costs start to increase Interest rates will also increase during late expansion, which is a further negative for stock valuation Expected growth in real economic output 3.0% Expected growth in the labor 2.0% Expected growth in capital stock, α = 0.7 1.2% w w w o The following table re ects economic data for market EM Using the Cobb Douglas production function and the data provided, the Solow residual is closest to: A) 1.2% B) 1.6% C) 2.0% Explanation https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83450049/print 56/61 10/12/2018 Learning Management System Solow residual = %ΔTFP = %ΔY − α(%ΔK) − (1 − α)%ΔL = 3.0% − 0.7(1.2%) − 0.3(2.0%) = 1.56% (Study Session 8, Module 17.1, LOS 17.b) Related Material SchweserNotes - Book Question #92 of 99 in Suppose the United States has a persistent current account de cit Which of the following time period? en tre approaches to forecasting currencies best explains why the U.S dollar will be strong during this A) The savings-investment imbalances approach B) The capital ows approach bo ok c C) The relative economic strength approach Explanation o m The savings-investment imbalances approach begins by stating that a savings de cit exists when investment is greater than domestic savings To compensate for a savings de cit, a country's currency must increase in value and stay strong to attract and keep foreign capital At the same time the country will have a current account de cit where exports are less than imports Although a current account de cit would normally indicate that the currency would weaken, the currency must stay strong to attract foreign capital w w (Study Session 8, Module 16.9, LOS 16.q) Related Material w SchweserNotes - Book Question #93 of 99 Which of the following is consistent with a steeply upwardly sloping yield curve? A) Monetary policy is expansive while scal policy is restrictive B) Monetary policy is restrictive and scal policy is restrictive C) Monetary policy is expansive and scal policy is expansive https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83450049/print 57/61 10/12/2018 Learning Management System Explanation When both scal and monetary policies are expansive, the yield curve is sharply, upwardly sloping (i.e., short-term rates are lower than long-term rates), and the economy is likely to expand in the future (Study Session 8, Module 16.5, LOS 16.i) Related Material SchweserNotes - Book in Question #94 of 99 en tre Which of the following statements least likely represents a scenario from an exogenous shock? A) A country defaults on its debt payments, thereby causing the country’s currency to lose value and forcing the central bank to take measures to stabilize the banking bo ok c d h B) Political unrest in the Middle East leading to an unexpected decrease in oil production, increased oil prices, decreased consumer spending, increased l d l d C) OPEC not being able to agree on production levels leading to increased uncertainty in global markets and increased oil prices m Explanation w w w o The OPEC meeting and probable outcomes could be anticipated and already factored into current oil prices leading to the least severe outcome of the answer choices Exogenous shocks usually lead to economic slowdowns, as in the case of an oil shock leading to higher prices, in ation, reduced consumer spending, increased unemployment, and a slowing economy A reduction in oil prices could be caused by a weak global economy with weak demand for oil or an oversupply of oil in the global market This would reduce the price of oil and boost the economy, potentially overheating it in which causes high in ation and increased interest rates that ultimately slow the economy down In a nancial crisis the result is usually characterized by banks becoming vulnerable and requiring action by the central bank to stabilize the banking system and economy by increasing liquidity and lowering interest rates (Study Session 8, Module 16, LOS 16.k) Related Material SchweserNotes - Book Question #95 of 99 https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83450049/print 58/61 10/12/2018 Learning Management System A long-short, market neutral strategy is most likely indicative of which kind of forecasting technique to predict returns? A) Bottom up B) Combination of both top down and bottom up C) Top down Explanation in A long-short, market neutral strategy utilizes a trading strategy where an overvalued stock is shorted and a similar stock within the same industry thought to be undervalued is bought indicative of a bottom up strategy in which the analyst rst takes a microeconomic perspective by focusing on the fundamentals of individual rms (Study Session 8, Module 17.3, LOS 17.e) en tre Related Material Question #96 of 99 bo ok c SchweserNotes - Book Which of the following is NOT a governmental structural policy that would promote the long- m term growth in an economy? o A) A promotion of competition B) Minimal government interference in the economy w w C) A redistributive tax system Explanation w When wealth is redistributed through the government's tax policy, economic ine ciency is created Tax policies should promote economic growth as much as possible (Study Session 8, Module 16.6, LOS 16.j) Related Material SchweserNotes - Book Question #97 of 99 The use of appraisal data, relative to actual returns, results in: https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83450049/print 59/61 10/12/2018 Learning Management System A) correlations that are biased upwards and standard deviations that are biased upwards B) correlations that are biased upwards and standard deviations that are biased downwards C) correlations that are biased downwards and standard deviations that are biased downwards Explanation in The use of appraisal data, relative to actual returns, results in correlations that are biased downwards and standard deviations that are biased downwards The reason is that price uctuations are masked by the use of appraised data (Study Session 8, Module 16.1, LOS 16.b) en tre Related Material Question #98 of 99 bo ok c SchweserNotes - Book Which of the following regarding the setting of capital market expectations is least accurate? m A) When a fairly constant set of experts is polled, this method is referred to as panel method .o B) Analysts should adjust the forecasts from quantitative models using judgment, w w when appropriate C) Surveys of practitioners have found them to be consistently more pessimistic than w that of academics Explanation Studies have found that the expectations of practitioners are consistently more optimistic than that of academics (Study Session 8, Module 16.3, LOS 16.d) Related Material SchweserNotes - Book Question #99 of 99 https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83450049/print 60/61 10/12/2018 Learning Management System Suppose that Government A decreased the tari on foreign goods and that Government B has moved to a lower marginal tax rate Analyzing the e ects on the long-term growth rate in the economy, which of the following would be most accurate? A) Government A’s growth rate will increase and Government B’s growth rate will increase B) Government A’s growth rate will decrease and Government B’s growth rate will decrease C) Government A’s growth rate will decrease and Government B’s growth rate will increase .in Explanation (Study Session 8, Module 16.4, LOS 16.e) Related Material w w w o m bo ok c SchweserNotes - Book en tre If the government decreases the tari on foreign goods, competition should increase, increasing economic e ciency, and the long-term growth rate The same is true of a cut in the tax rate (i.e., the long-term growth should increase) https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83450049/print 61/61 ... can determine whether or not the market is over or under priced B) A 10 year moving average P/E ratio greater than the current P/E ratio for a market indicates the market is currently undervalued... longer-term cash instruments to shorter-term cash instruments and from less credit worthy instruments to more credit worthy instruments C) shift from shorter-term cash instruments to longer-term... Question #17 of 99 An equity market' s forecasted EPS is 15 .30 Assuming a required real return on equity of 8%, a current dividend of 10, current supernormal growth of 9.5%, a long-term sustainable rate