Deck 17: Options Markets: Introduction

Question 1

A declining GDP indicates a(n)______ economy with ______ opportunity for a firm to increase sales.

A)stagnant; little
B)stagnant; ample
C)expanding; little
D)expanding; ample
E)stable; no

Answer 1

A

Question 2

If the economy is growing,firms with low operating leverage will experience __________.

A)higher increases in profits than firms with high operating leverage
B)similar increases in profits as firms with high operating leverage
C)smaller increases in profits than firms with high operating leverage
D)no change in profits
E)none of the above

Answer 2

C

Question 3

GDP refers to _________.

A)the amount of personal disposable income in the economy
B)the difference between government spending and government revenues
C)the total manufacturing output in the economy
D)the total production of goods and services in the economy
E)none of the above

Answer 3

D

Question 4

A peak is ________.

A)a transition from an expansion in the business cycle to the start of a contraction
B)a transition from a contraction in the business cycle to the start of an expansion
C)a depression that lasts more than three years
D)only a feature of geography and not an investment term
E)none of the above

Question 5

If the economy were going into a recession,an attractive industry to invest in would be the ________ industry.

A)automobile
B)medical services
C)construction
D)A and C
E)B and C

Question 6

A firm in an industry that is very sensitive to the business cycle will likely have a stock beta ___________.

A)greater than 1.0
B)equal to 1.0
C)less than 1.0 but greater than 0.0
D)equal to or less than 0.0
E)There is no relationship between beta and sensitivity to the business cycle.

Question 7

A rapidly growing GDP indicates a(n)______ economy with ______ opportunity for a firm to increase sales.

A)stagnant; little
B)stagnant; ample
C)expanding; little
D)expanding; ample
E)stable; no

Question 8

The "real",or inflation-adjusted,exchange rate,is

A)the balance of trade.
B)the budget deficit.
C)the purchasing power ratio.
D)unimportant to the U.S.economy.
E)none of the above.

Question 9

If the economy is shrinking,firms with high operating leverage will experience __________.

A)higher decreases in profits than firms with low operating leverage
B)similar decreases in profits as firms with low operating leverage
C)smaller decreases in profits than firms with low operating leverage
D)no change in profits
E)none of the above

Question 10

The most widely used monetary tool is ___________.

A)altering the discount rate
B)altering the reserve requirements
C)open market operations
D)altering marginal tax rates
E)none of the above

Question 11

If the economy is shrinking,firms with low operating leverage will experience __________.

A)higher decreases in profits than firms with high operating leverage
B)similar decreases in profits as firms with high operating leverage
C)smaller decreases in profits than firms with high operating leverage
D)no change in profits
E)none of the above

Question 12

The "normal" range of price-earnings ratios for the S&P500 Index is

A)between 2 and 10.
B)between 5 and 15.
C)less than 8.
D)between 12 and 25.
E)greater than 20.

Question 13

Industrial production refers to _________.

A)the amount of personal disposable income in the economy
B)the difference between government spending and government revenues
C)the total manufacturing output in the economy
D)the total production of goods and services in the economy
E)none of the above

Question 14

Monetary policy is determined by

A)government budget decisions.
B)presidential mandates.
C)the board of Governors of the Federal Reserve System.
D)congressional actions.
E)none of the above

Question 15

A top down analysis of a firm starts with ____________.

A)the relative value of the firm
B)the absolute value of the firm
C)the domestic economy
D)the global economy
E)the industry outlook

Question 16

Demand-side economics is concerned with _______.

A)government spending and tax levels
B)monetary policy
C)fiscal policy
D)A and B
E)A,B,and C

Question 17

A trough is ________.

A)a transition from an expansion in the business cycle to the start of a contraction
B)a transition from a contraction in the business cycle to the start of an expansion
C)a depression that lasts more than three years
D)only something used by farmers to feed pigs and not an investment term
E)none of the above

Question 18

An example of a highly cyclical industry is ________.

A)the automobile industry
B)the tobacco industry
C)the food industry
D)A and B
E)B and C

Question 19

The average duration of unemployment and changes in the consumer price index for services are_________.

A)leading economic indicators
B)coincidental economic indicators
C)lagging economic indicators
D)composite economic indicators
E)none of the above

Question 20

If the economy is growing,firms with high operating leverage will experience __________.

A)higher increases in profits than firms with low operating leverage
B)similar increases in profits as firms with low operating leverage
C)smaller increases in profits than firms with low operating leverage
D)no change in profits
E)none of the above

Question 21

Which of the following are examples of defensive industries?

A)Food producers.
B)Durable goods producers.
C)Pharmaceutical firms.
D)Public utilities.
E)A,C and D

Question 22

If interest rates increase,business investment expenditures are likely to ______ and consumer durable expenditures are likely to _________.

A)increase, increase
B)increase, decrease
C)decrease, increase
D)decrease, decrease
E)be unaffected,be unaffected

Question 23

If the economy is strong,the after-tax profit of Firm B will be __________.

A)$0
B)$6,000
C)$36,000
D)$60,000
E)none of the above

Question 24

Supply-side economists wishing to stimulate the economy are most likely to recommend

A)a decrease in the money supply.
B)a decrease in production output.
C)an increase in the real interest rate.
D)a decrease in the tax rate.
E)none of the above.

Question 25

Assume that the Federal Reserve decreases the money supply.This action will cause ________ to decrease.

A)interest rates
B)the unemployment rate
C)investment in the economy
D)trade balance
E)none of the above

Question 26

If the economy is strong,the after-tax profit of Firm A will be _______.

A)$0
B)$6,000
C)$36,000
D)$60,000
E)none of the above

Question 27

If the economy enters a recession,the after-tax profit of Firm B will be _______.

A)$0
B)$6,000
C)$36,000
D)$60,000
E)none of the above

Question 28

If the currency of your country is appreciating,the result should be to ______ exports and to _______ imports.

A)stimulate, stimulate
B)stimulate, discourage
C)discourage, stimulate
D)discourage, discourage
E)not affect,not affect

Question 29

Which of the following are not examples of defensive industries?

A)Food producers.
B)Durable goods producers.
C)Pharmaceutical firms.
D)Public utilities.
E)B and C

Question 30

Calculate firm A's degree of operating leverage.

A)11.0
B)2.86
C)9.09
D)1.00
E)none of the above.

Question 31

Calculate firm B's degree of operating leverage.

A).714
B)9.09
C)7.86
D)7.14
E)none of the above.

Question 32

Classifying firms into groups,such as _________ provides an alternative to the industry life cycle.

A)slow-growers
B)stalwarts
C)countercyclicals
D)A and B
E)A and C

Question 33

The stock price index and new orders for nondefense capital goods are

A)leading economic indicators.
B)coincidental economic indicators.
C)lagging economic indicators.
D)not useful as economic indicators.
E)none of the above.

Question 34

Increases in the money supply will cause demand for investment and consumption goods to _______ in the short run and cause prices to ________in the long run.

A)increase, increase
B)increase, decrease
C)decrease, increase
D)decrease, hold steady
E)be unaffected,be unaffected

Question 35

A firm in the early stages of the industry life cycle will likely have ________.

A)high market penetration
B)high risk
C)rapid growth
D)A and C
E)B and C

Question 36

Fiscal policy generally has a _______ direct impact than monetary policy on the economy,and the formulation and implementation of fiscal policy is ______ than that of monetary policy.

A)more, quicker
B)more, slower
C)less, quicker
D)less, slower
E)Cannot tell from the information given.

Question 37

Assume the U.S.government was to decide to decrease the budget deficit.This action will most likely cause __________ to decrease.

A)interest rates
B)government borrowing
C)unemployment
D)both A and B
E)none of the above

Question 38

If the economy enters a recession,the after-tax profit of Firm A will be ________.

A)$0
B)$6,000
C)$30,000
D)$60,000
E)none of the above

Question 39

Assume the U.S.government was to decide to increase the budget deficit.This action will most likely cause __________ to increase.

A)interest rates
B)government borrowing
C)unemployment
D)both A and B
E)none of the above

Question 40

If the currency of your country is depreciating,the result should be to ______ exports and to _______ imports.

A)stimulate, stimulate
B)stimulate, discourage
C)discourage, stimulate
D)discourage, discourage
E)not affect,not affect

Question 41

The industry with the highest ROE in 2009 was

A)food.
B)data storage.
C)business software.
D)computer systems.
E)integrated oil & gas.

Question 42

Investment manager Peter Lynch refers to firms that are in bankruptcy or soon might be as

A)slow growers.
B)stalwarts.
C)cyclicals.
D)asset plays.
E)turnarounds.

Question 43

The emerging stock market exhibiting the highest local currency return in 2009 was

A)Russia
B)China
C)Poland
D)Mexico
E)Bolivia

Question 44

Which of the following are key economic statistics that are used to describe the state of the macroeconomy?
I)Gross domestic product
II)The unemployment rate
III)Inflation
IV)Consumer sentiment
V)The budget deficit

A)I, II, and V
B)I, III, and V
C)I, II, and III
D)I, II, III, and V
E)I,II,III,IV,and V

Question 45

In recent years,P/E multiples for S&P500 companies have

A)ranged from -1 to -10.
B)ranged from 1 to 8.
C)ranged from 6 to 10.
D)ranged from 12 to 25.
E)ranged from 20 to more than 50.

Question 46

According to Michael Porter,there are five determinants of competition.An example of _____ is when the availability limits the prices that can be charged to customers.

A)Threat of Entry
B)Rivalry between Existing Competitors
C)Pressure from Substitute Products
D)Bargaining power of Buyers
E)Bargaining power of Suppliers

Question 47

The life cycle stage in which industry leaders are likely to emerge is the

A)start-up stage.
B)maturity stage.
C)consolidation stage.
D)relative decline stage.
E)all of the above.

Question 48

According to Michael Porter,there are five determinants of competition.An example of _____ is when competitors seek to expand their share of the market.

A)Threat of Entry
B)Rivalry between Existing Competitors
C)Pressure from Substitute Products
D)Bargaining power of Buyers
E)Bargaining power of Suppliers

Question 49

Sector rotation

A)should always be carried out.
B)is never worthwhile.
C)is shifting the portfolio more heavily toward an industry or sector that is expected to perform well in the future.
D)can be implemented costlessly.
E)none of the above

Question 50

The process of estimating the dividends and earnings that can be expected from the firm based on determinants of value is called

A)business cycle forecasting.
B)macroeconomic forecasting.
C)technical analysis.
D)fundamental analysis.
E)none of the above.

Question 51

________ is a proposition that a strong proponent of supply side economics would most likely stress.

A)Higher marginal tax rates will lead to a reduction in the size of the budget deficit and lower interest rates as they depend on government revenues.
B)Higher marginal tax rates promote economic inefficiency and thereby retard aggregate output as they encourage investors to undertake low productivity projects with substantial tax shelter benefits.
C)Income redistribution payments will exert little impact on real aggregate supply as they do not consume resources directly.
D)A tax reduction will increase the disposable income of households, and thus, the primary impact of a tax reduction on aggregate supply will stem from the influence of the tax change on the size of the budget deficit or surplus.
E)None of the above is a likely statement for a supply-side proponent.

Question 52

An example of a positive demand shock is

A)a decrease in the money supply.
B)a decrease in government spending.
C)a decrease in foreign export demand.
D)a decrease in the price of imported oil.
E)a decrease in tax rates.

Question 53

The industry with the lowest return in 2009 was

A)renewable energy equipment.
B)oil equipment.
C)health care.
D)brokerage.
E)banking.

Question 54

During which stage of the industry life cycle would a firm experience stable growth in sales?

A)Consolidation
B)Relative Decline
C)Maturity
D)Start-up
E)Stabilization

Question 55

Investors can ______ invest in an industry with the highest expected return by purchasing ______.

A)most easily; industry-specific iShares
B)not; industry-specific iShares
C)most easily; industry-specific ADRs
D)not; individual stocks
E)none of the above

Question 56

A top-down analysis of a firm's prospects starts with

A)an examination of the firm's industry.
B)an evaluation of the firm's position within its industry.
C)a forecast of interest rate movements.
D)an assessment of the broad economic environment.
E)the application of the CAPM to find the firm's theoretical return.

Question 57

According to Michael Porter,there are five determinants of competition.An example of _____ is when new entrants to an industry put pressure on prices and profits.

A)Threat of Entry
B)Rivalry between Existing Competitors
C)Pressure from Substitute Products
D)Bargaining power of Buyers
E)Bargaining power of Suppliers

Question 58

The emerging stock market exhibiting the highest U.S.dollar return in 2009 was

A)Brazil
B)Argentina
C)Poland
D)Mexico
E)China

Question 59

The industry with the lowest ROE in 2009 was

A)food.
B)data storage.
C)business software.
D)iron/steel.
E)integrated oil & gas.

Question 60

The industry with the highest return in 2009 was

A)home construction.
B)travel and tourism.
C)health care.
D)brokerage.
E)banking.

Question 61

If the economy is strong,the total cost of Firm C will be ________.

A)$1,680,000
B)$1,170,000
C)$1,350,000
D)$420,000
E)none of the above

Question 62

If the economy enters a recession,the total cost of Firm C will be ________.

A)$1,680,000
B)$1,170,000
C)$750,000
D)$420,000
E)none of the above

Question 63

If the economy is strong,the after-tax profit of Firm C will be _______.

A)$0
B)$6,000
C)$36,000
D)$60,000
E)$630,000

Question 64

If the economy is strong,the before tax profit of Firm C will be ________.

A)$1,680,000
B)$1,050,000
C)$510,000
D)$204,000
E)none of the above

Question 65

List and discuss three of the five determinants of competition suggested in Porter's 1985 study.

Question 66

Discuss the tools of the U.S.government's "demand-side" policy.Include in your discussion of these tools the relative advantages and disadvantages of each in terms of the effect of the use of these tools on the economy.

Question 67

Discuss the National Bureau of Economic Research (NBER)'s indexes of economic indicators,and how each of the categories of these indicators might be used by the securities' analyst.

Question 68

If interest rates decrease,business investment expenditures are likely to ______ and consumer durable expenditures are likely to _________.

A)increase, increase
B)increase, decrease
C)decrease, increase
D)decrease, decrease
E)be unaffected,be unaffected

Question 69

If the economy enters a recession,the total revenue of Firm C will be ________.

A)$1,680,000
B)$1,400,000
C)$2,000,000
D)$0
E)none of the above

Question 70

If the economy enters a recession,the before tax profit of Firm C will be ________.

A)$1,680,000
B)$1,170,000
C)$510,000
D)$204,000
E)none of the above

Question 71

If a firm's sales decrease by 15% and profits decrease by 20% during a recession,the firms operating leverage is ____________?

A)1.33
B)0.75
C)5
D)-5
E)none of the above

Question 72

An example of a defensive industry is ________.

A)the automobile industry
B)the tobacco industry
C)the food industry
D)A and B
E)B and C

Question 73

According to Michael Porter,there are five determinants of competition.An example of _____ is when a buyer purchases a large fraction of an industry's output and can demand price concessions.

A)Threat of Entry
B)Rivalry between Existing Competitors
C)Pressure from Substitute Products
D)Bargaining power of Buyers
E)Bargaining power of Suppliers

Question 74

Discuss the industry life cycle,how this concept can be used by security analysts,and the limitations of this concept for security analysis.

Question 75

If the economy is strong,the total revenue of Firm C will be ________.

A)$1,680,000
B)$1,400,000
C)$2,000,000
D)$2,400,000
E)none of the above

Question 76

If the economy enters a recession,the after-tax profit of Firm C will be ________.

A)$1,680,000
B)$750,000
C)$510,000
D)$204,000
E)$306,000

Question 77

If the economy is strong,the tax of Firm C will be ________.

A)$420,000
B)$750,000
C)$510,000
D)$204,000
E)none of the above

Question 78

If the economy enters a recession,the tax of Firm C will be ________.

A)$1,680,000
B)$750,000
C)$510,000
D)$204,000
E)none of the above

Question 79

Discuss the ways in which the global economy might have an effect on a firm whose headquarters are in Montana.Be specific - cite some of the relevant factors that should be considered.

Question 80

Assume the U.S.government was to decide to increase the budget deficit.This action will most likely cause __________ to increase.

A)interest rates
B)government borrowing
C)unemployment
D)both A and B
E)none of the above