Institutional Advisors for All Inc., or IAAI, is a consulting firm that primarily advises all types of institutions such as foundations, endowments, pension plans, and insurance companies. IAAI also provides advice to a select group of individual investors with large portfolios. One of the claims the firm makes in its advertising is that IAAI devotes considerable resources to forecasting and determining long-term trends; then, they use commonly accepted investment models to determine how these trends should affect the performance of various investments. The members of the research department of IAAI have recently reached some conclusions concerning some important macroeconomic trends. For instance, they have seen an upward trend in job creation and consumer confidence and predict that this should continue for the next few years. Other domestic leading indicators that the research department at IAAI wishes to consider are retail sales, unemployment insurance, the Institute for Supply Management (ISM) manufacturing survey, durable good orders and the employment cost index. In light of the predictions for job creation and consumer confidence, the investment advisors at IAAI want to make recommendations for their clients. They use established theories that relate job creation and consumer confidence to inflation and interest rates, and they then incorporate the forecasted movements in inflation and interest rates into established models for explaining asset prices. Their primary concern is to forecast how the trends in job creation and consumer confidence should affect bond prices and how those trends should affect stock prices. The members of the research department at IAAI also note that stocks have been trending up in the past year, and this information is factored into the forecasts of the overall economy that they deliver. The researchers consider an upward trending stock market as a positive economic indicator in itself; however, they disagree as to the reason this should be the case. The senior management at IAAI recently issued a directive that the research department should devote more resources to international trends. In response, the members of the research department have been investigating the use of international indicators that might help establish turning points in specific geographic regions and the entire world. Among the indicators they are investigating are Japans Tankan Survey, Japan Industrial Production, China Industrial Production, Brazil Industrial Production, German Consumer Price Index, the German Industrial Production, France Monthly Business Survey, Organization for Economic Cooperation and Development (OECD) Composite Leading Indicators, and the Eurozone Manufacturing Purchasing Managers Index. The members of the research department at IAAI have noted the relative usefulness of these various indicators. The researchers at IAAI have forecasted positive trends for both job creation and consumer confidence. Which, if either, of the trends should have a positive affect on stock prices?
| Job creation | Consumer confidence |
Answer and Explanation
Equity prices are positively correlated with job creation or longer work weeks, as each new dollar earned means more money will be spent. High confidence presages well for spending and stock prices.
The researchers at IAAI have forecasted positive trends for both job creation and consumer confidence. Which, if either, of the trends should have a positive affect on bond prices?
| Job creation | Consumer confidence |
Answer and Explanation
Bond prices are inversely affected by employment levels. A high level of job creation could be indicative of future inflation and higher interest rates, which depress bond prices. Lower employment implies a weaker economy and the prospect of lower interest rates and higher bond prices. High consumer confidence may lead to increased interest rates and reduced bond prices.
Stock prices are useful as a leading indicator. To explain this phenomenon, which of the following is most correct? Stock prices: | A) | reflect the trends in other leading indicators only, and do not have predictive power of their own. |
| | B) | predict future interest rates, but they are not correlated with other leading indicators. |
| C) | predict future interest rates and reflect the trends in other indicators. |
| | D) | do not predict future interest rates nor are they correlated with other leading indicators; the usefulness of stock prices as a leading indicator is a mystery. |
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Answer and Explanation
Stock prices are one of the leading indicators. One possible explanation is that stock prices anticipate future interest rates, corporate earnings, and dividends. Another possible explanation is that stock prices react to changes in the other leading economic indicators, such as changes in the money supply or the spread between long-term and short-term interest rates.
Which of the domestic series that the IAAI research department listed for use as leading indicators is least appropriate? | A) | ISM manufacturing survey. |
| | B) | The employment cost index. |
| C) | Unemployment insurance. |
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Answer and Explanation
Unemployment insurance is a coincident indicator. All the other are leading indicators.
Which of the following international indicators is considered the most useful as a leading indicator? | A) | France Monthly Business Survey. |
| | B) | Eurozone Manufacturing Purchasing Managers Index. |
| C) | German Industrial Production. |
| | D) | German Consumer Price Index. |
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Answer and Explanation
In order of usefulness, they are German Industrial Production, German Consumer Price Index, France Monthly Business Survey and Eurozone Manufacturing Purchasing Managers Index. However, the German Consumer Price Index is more of a coincident indicator than a leading indicator.
Which of the following international indicators is considered the least useful as a leading indicator? | | B) | Japan Industrial Production. |
| C) | China Industrial Production. |
| | D) | OECD Composite Leading Indicators. |
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Answer and Explanation
The order of usefulness is Japans Tankan Survey, Japan Industrial Production, OECD Composite Leading Indicators and China Industrial Production. Analysts find China Industrial Production as the least useful because of the data problems associated with information from China. | 
发表于 2008-9-12 15:59
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