FINANCIAL MARKETS AND INSTITUTIONS – FIN 371
Answer the following questions:
- Discuss two factors that may justify higher aggregate P/E ratios than the historical average P/E of approximately 15. (20%)
- Assuming the aggregate P/E ratio stays the same, the real price appreciation of stock is equal to the real growth rate in per share earnings. Do you agree or disagree? Explain your answer. (20%)
- State three US economic indicators that are likely to have a high overall impact on the financial markets and briefly explain why each indicator is important to the markets. (20%)
- The Consumer Price Index (CPI) is published on a monthly basis. If next month the CPI is lower than generally expected, describe how you would expect the (i) bond, (ii) equity and (iii) currency markets to react. (20%)
- Economic indicators are used by many analysts to forecast the future direction of the US economy. For the following three indicators, list them in order of how accurately they can predict the start of a recession (the most accurate predictor being first). Briefly explain why each indicator is or is not a useful indicator. (20%)
(i) Consumer confidence index
(ii) Gross Domestic Product
(iii) Index of Leading Economic Indicators
Word Limit: There is no word limit but you are advised to keep your answers short and concise.
Deadline for submitting the memo: Friday, 13 January 2012
Format: Times New Roman fonts (size 12) and 1.5 line spacing.
This is an individual assignment