19 a stock prices are one of the leading indicators

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19. a. Stock prices are one of the leading indicators. One possible explanation is that stock prices anticipate future interest rates, corporate earnings, and dividends. Another possible explanation is that stock prices react to changes in the other leading economic indicators, such as changes in the money supply or the spread between long-term and short-term interest rates. 20. a. Industrial production is a coincident indicator; the others are leading. 21. b. If historical returns are used, the arithmetic and geometric means of returns are available. The geometric mean is preferred for multiperiod horizons to observe long-term trends. An alternative to the equity risk premium is to use a moving average of recent historical market returns. This will reveal a low expected equity risk premium when times have been bad, which is contrary to investor expectations. When using historical data, there is a trade- off between long and short time spans. Short time spans are helpful to reduce the impact of regime changes. Long time spans provide better statistical data that are less sensitive. 22. a. Foreign exchange rates can significantly affect the competitiveness and profitability for a given industry. For industries that derive a significant proportion of sales via exports, an appreciating currency is usually bad news because it makes the industry less competitive overseas. Here, the appreciating French currency makes French imports more expensive in England. 23. Determinants of buyer power include buyer concentration, buyer volume, buyer information, available substitutes, switching costs, brand identity, and product differences. Point 1 addresses available substitutes, Point 2 addresses buyer information, and Point 4 addresses buyer volume and buyer concentration. Point 3, which addresses the number of competitors in the industry, and Point 5, new entrants, may be factual statements but do not support the conclusion that consumers have strong bargaining power. 24. a. Product differentiation can be based on the product itself, the method of delivery, or the marketing approach. 25. A firm with a strategic planning process not guided by its generic competitive strategy usually makes one or more of the following mistakes: 1. The strategic plan is a list of unrelated action items that do not lead to a sustainable competitive advantage. 2. Price and cost forecasts are based on current market conditions and fail to take into account how industry structure will influence future long-term industry profitability. 3. Business units are placed into categories such as build, hold, and harvest; with businesses failing to realize that these are not business strategies, but rather the means to achieve the strategy. 4. The firm focuses on market share as a measure of competitive position, failing to realize that market share is the result and not the cause of a sustainable competitive position. Smith’s observations 2 and 3 describe two of these

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