Lecture5 - AEM 423 Copyright © by Vicki Bogan Investment Environment Economic Environment Economic environment is critical to financial markets

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Unformatted text preview: AEM 423 Copyright © by Vicki Bogan Investment Environment Economic Environment ¡ Economic environment is critical to financial markets ¡ Wall Street economists spend considerable time and effort trying to forecast the economic environment in which the financial markets operate Economic Environment ¡ During an economic boom ¡ Sales increase ¡ Profits grow ¡ Stock prices march upward ¡ Generally interests rates tend to rise ¡ As firms increase their demand for credit to finance expanding inventories and capital spending ¡ Technology stocks and cyclical stocks do especially well Economic Environment ¡ During an economic downturn ¡ Sales decrease ¡ Profits decline ¡ Stock prices move down ¡ Generally interests rates tend to fall Economic Environment ¡ Aggregate economic activity generally measured by real GDP and other key economic variables ¡ Unemployment rates ¡ Inflation ¡ Interest rates ¡ Consumer sentiment ¡ International measures Gross Domestic Product (GDP) ¡ Measure of the economy’s total production of goods and services ¡ Rapidly growing GDP indicates an expanding economy with ample opportunity for a firm to increase sales Unemployment Rate ¡ Percentage of the total labor force yet to find work ¡ Must be actively seeking employment to be considered in calculation ¡ Measures the extent to which the economy is operating at full capacity Inflation ¡ Rate at which the general level of prices is rising ¡ High rates of inflation often are associated with “overheated” economies ¡ Demand for goods and services is outstripping productive capacity Interest Rates ¡ High interest rates reduce the present value of future cash flows thereby reducing the attractiveness of investment opportunities ¡ Real interest rates key determinant of...
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This note was uploaded on 09/03/2009 for the course AEM 4230 taught by Professor Bogan,v. during the Fall '08 term at Cornell University (Engineering School).

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Lecture5 - AEM 423 Copyright © by Vicki Bogan Investment Environment Economic Environment Economic environment is critical to financial markets

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