Chapter 12 of the text, questions 3-4 3. Explain the following statements: ( a)

Question

Chapter 12 of the text, questions 3-4

3. Explain the following statements: ( a) There is a strong, consistent relationship between money supply changes and stock prices. ( b) Money supply changes cannot be used to predict stock price movements.

4. The current rate of inflation is 3 percent, and long- term Treasury bonds are yielding 7 percent. You estimate that the rate of inflation will increase to 6 percent. What do you expect to happen to long- term bond yields? Compute the effect of this estimated change in inflation on the price of a 15- year, 10 percent coupon bond with a current yield to maturity of 8 percent.

Chapter 13, questions 1-2.

1.Briefly describe the results of studies that examined the performance of alternative industries during specific time periods, and discuss their implications for industry analysis.

2. Briefly describe the results of the studies that examined industry performance over time. Do these results complicate or simplify industry analysis?

Explanation / Answer

12-3. Most of the studies have shown that there is a consistent relationship in between the variations in money supply and stock prices.This evidient from R2,which would be used while explaining the relation in between the money supply and stock price changes. However it would not be possible to predict the stock price movements along with variations in money supply. This is because of the reason that the investors consider changes in money supply as a significant variable, and is impossible to derive excessive profits with a watch on recent or past movements in money supply.

12-4. If there exist a full fledge expectation of rise in level of inflation in markets, then the long-term bond rate would increase to 10%. If we consider the effect of change in inflation from 6% to 10%, for the 15-year 8% bond the price of the bond would range from $1,091 to $847.

13-1. Most of the results from research studies have concluded that there exist differences in between the absolute and relative performance within the industries in a specific time period. In an addition to this it was mentioned that the differences in industry performance would be observed in alternative periodical times, that is where the time periods may vary in length.Hence the investor after forecasting the market moves must also examine the alternative industries performance, this should be done due to the wide dispersion of industry performance over anticipated market performances.

13-2. Most of the empirical studies have reported that the performance of the industry would be variable over times. However when they are ranked over times a little amount of correlation exist in the rankings. As this result of correlations is done for different types of markets as well as different alternative time periods, the findings would imply that they alone would not be useful. Hence the analyst for attaining the probable result must put extra efforts in examination of industry, on the basis of industry future expected performance projections.

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