Topic 2 - Economy and Industry Analysis

Question 1

Earnings and dividend prospects, expectations for future interest rates and risk evaluation are all determinants of ‘Fun……l analy…’

Answer 1

Fundamental Analysis

Question 2

Fundamental Analysis is a method of determining a stocks ‘Int…..c Value’

Answer 2

Intrinsic Value is how much a particular stock is worth based on how much a company makes on its assets, as well as other factors. Value investors​ may use an intrinsic value formula to determine whether a stock is overvalued or under-priced in the market.

Question 3

True or False: It’s harder for businesses to succeed in Contracting economies than Expanding economies.

Answer 3

T R U E

Question 4

Do stock prices tend to rise with earnings?

Answer 4

YES

Question 5

What is the typical range for P/E (Price/Earning) ratios?

Answer 5

12 to 25

Question 6

The below are all Key Economic I - - - - - - - - rs;
Gross Domestic Product (GDP)
Employment
Inflation
Interest Rates
Budget Deficit
Sentiment

Answer 6

Key Economic Indicators

Question 7

True or False;
- Focus on increasing demand for goods/services is called Demand-side policy
- Focus on enhancing productive capacity of the economy is called Supply-side economics

Answer 7

True

Question 8

Which is Monetary policy, and which is Fiscal policy?
- Government budget decisions
- Actions taken by the RBA to influence the money supply or interest rates

Answer 8

• Fiscal = Government budget decisions
• Monetary = Actions taken by the RBA to influence the money supply or interest rates

Question 9

Tools of ? ? ? ? ? ? ? ? policy;
Open market operations
- Fed buys/sells bonds for its own account

Discount rate
- Interest rate the Fed charges banks on short-term loans
- Reductions in discount rate signal a more expansionary monetary policy

Reserve requirements
- Lowering requirements allows banks to make more loans with each dollar of deposits and stimulates the economy by increasing the effective money supply

Answer 9

Monetary

Question 10

True or False - Supply-side policies:

Goal is to create an environment in which workers and owners of capital have the maximum incentive and means to produce and develop goods

Supply-siders focus on how tax policy can improve incentives to work and invest

Answer 10

True

Question 11

What is the “Business Cycle?”

Answer 11

The recurring pattern of Recession and Recovery

Question 12

Y or N

Do leading ‘Economic Indicators’ tend to rise or fall in advance of the rest of the economy?

Answer 12

YES

Question 13

Operating leverage
- Refers to division between fixed and variable costs
- Profits of firms with greater variable costs (i.e. low operating leverage) will be less sensitive to business conditions
- Profits for firms with high fixed costs (i.e., high operating leverage) will swing more widely with sales

Financial leverage
- Interest is a fixed cost that increases the sensitivity of profits to the business cycle

Answer 13

Question 14

Sector rotation is an investment strategy which entails shifting the portfolio into industry sectors that are forecast to outperform others based on macroeconomic forecasts

Answer 14

Question 15

Below are the Five De??????ants of Competition:
- Threat of entry
- Rivalry between existing competitors
- Pressure from substitute products
- Bargaining power of buyers
- Bargaining power of suppliers

Answer 15

Determinants

Question 16

If the RBA planned to dramatically loosen monetary policy, what would your recommendations be regarding investments in Gold mining?

Answer 16

Gold is traditionally viewed as a hedge against inflation. Expansionary monetary policy may lead to increased inflation and could thus enhance the value of gold mining stocks (As inflation becomes more likely with lower interest rates).

Question 17

Define each of the following in the context of a business cycle.
a. Peak
b. Contraction
c. Trough
d. Expansion

Answer 17

a. A peak is the transition from the end of an expansion to the start of a contraction.
b. Contraction is the period from peak to trough.
c. A trough occurs at the bottom of a recession just as the economy enters a recovery.
d. Expansion is the period from trough to peak.

Question 18

Why does it make intuitive sense that the slope of the yield curve is considered a leading economic indicator?

Answer 18

The yield curve, by definition, incorporates future interest rates. As such, it reflects future expectations and is a leading indicator.