fixed income qualitative Flashcards
Q: What does the multiples approach compare in equity valuation?
A: It compares a firm’s current stock price to a benchmark (like P/E ratio) to assess mispricing.
Q: What’s the difference between forward and trailing P/E?
A: Forward uses forecasted EPS; trailing uses past 12-month EPS.
Q: What are two rational reasons for differences in P/E ratios?
A: Differences in (1) growth expectations and (2) perceived risk.
Q: What does a higher expected growth rate do to the P/E ratio?
A: Increases it, since price increases faster than earnings.
Q: What does a higher discount rate (risk) do to the P/E ratio?
A: Decreases it, as investors are less willing to pay a high price.
Q: What are defensive industries?
A: Sectors like utilities or consumer staples, which are stable through business cycles.
Q: What are cyclical industries?
A: Sectors like autos or luxury goods, which do well in expansions and poorly in recessions.
Q: How does accurate macroeconomic forecasting help investors?
A: It helps predict earnings/dividends and select the right P/E multiple to identify mispricing.
Q: What is sector rotation?
A: Shifting investment exposure between sectors based on economic cycle predictions.
Q: What is momentum investing?
A: Strategy based on buying stocks with strong past returns and selling those with weak returns.
Q: What did Jegadeesh and Titman (1993) find?
A: Stocks with strong returns in the past 6–12 months tend to continue outperforming short-term.
Q: What is market integration in trading strategy?
A: Using syndicated loan returns to predict stock returns due to information asymmetry.
Q: Why are syndicated loans informative for stock returns?
A: Because private loan markets may have material non-public information not priced into stocks yet.
Q: What are two potential explanations for loan-to-stock predictability?
A: (1) Investor inattention and (2) cross-market information processing constraints.
