Tutorial answers 5 - 2206 AFE Tutorial answers 5 Week 8...

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2206 AFE Tutorial answers 5 Week 8 Chapter 12 Questions 1,6 p.456 Problem 2 (priority) p. 456 Chapter 13 Questions 4,7,8 p.506 Chapter 12 Question 1 (p.456) The reason for the strong relationship between the aggregate economy and the stock market is obvious if one considers that stock prices reflect changes in expectations for firms and the results for individual firms are affected by the overall performance of the economy. In essence, you would expect earnings of firms to increase in an expansion. Then, if the P/E ratio remains constant or increases because of higher expectations and there is no reason why it should not, you would expect an increase in stock prices. Question 6 (p.456) Most of the inputs in determining the price of a bond are known – for instance, the promised coupon payments, the principal amount, and the dates on which those payments will be received. The one variable to be estimated is the required return, which can be found easily by comparing the bond in question to a similar existing bond. In contrast, the payments on common stock are not known, nor the dates on which they might be received. Further, the required return is more difficult to estimate. Problem 2 (p.456) CFA Examination I (June 1983) 2(a).1. The National Bureau of Economic Research has conducted extensive analysis of leading, coincident, and lagging indicators of general economic activity. Business Conditions Digest classifies economic indicators by their participation in the stage of the economic process and their relationship to business cycle movements. The leading indicators include those economic time series that usually reach peaks or
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Tutorial answers 5 - 2206 AFE Tutorial answers 5 Week 8...

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