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Reading 24: Macroanalysis and Microvaluation of the Stock

Q3. Stock prices are useful as a leading indicator. To explain this phenomenon, which of the following is most accurate? Stock prices:

A)   predict future interest rates and reflect the trends in other indicators.

B)   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.

C)   reflect the trends in other leading indicators only, and do not have predictive power of their own.

Q4. Which of the domestic series that the IAAI research department listed for use as leading indicators is least appropriate?

A)   Manufacturing average weekly hours.

B)   Industrial production.

C)   M2 money supply.

Q5. IAAI uses primarily historical data in its calculations and forecasts. Which of the following regarding the actions of IAAI is most accurate?

A)   Credit risk premiums may be useful to IAAI because they are based on actual market expectations.

B)   IAAI should use a moving average of recent stock returns when times are bad because it will result in a high expected equity risk premium.

C)   Long time spans should be used so that regime changes can be factored into the forecasts.

答案和详解如下:

Q3. Stock prices are useful as a leading indicator. To explain this phenomenon, which of the following is most accurate? Stock prices:

A)   predict future interest rates and reflect the trends in other indicators.

B)   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.

C)   reflect the trends in other leading indicators only, and do not have predictive power of their own.

Correct answer is A)

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.

Q4. Which of the domestic series that the IAAI research department listed for use as leading indicators is least appropriate?

A)   Manufacturing average weekly hours.

B)   Industrial production.

C)   M2 money supply.

Correct answer is B)

Industrial production is a coincident indicator. Both of the others are leading indicators.

Q5. IAAI uses primarily historical data in its calculations and forecasts. Which of the following regarding the actions of IAAI is most accurate?

A)   Credit risk premiums may be useful to IAAI because they are based on actual market expectations.

B)   IAAI should use a moving average of recent stock returns when times are bad because it will result in a high expected equity risk premium.

C)   Long time spans should be used so that regime changes can be factored into the forecasts.

Correct answer is A)

When historical returns are used, both the arithmetic and geometric means of returns are available, however the geometric mean is preferred for multi-period horizons to look at long-term trends. An alternative to the equity risk premium is to use a moving average of recent historical market returns. However this will reveal a low expected equity risk premium when times have been bad, which is contrary to investor expectations. When using historical data, there is a tradeoff between long and short time spans. Short time spans are helpful to reduce the impact of regime changes. Long time spans provide better statistical data that is less sensitive.

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