1.) Assume you had a crystal ball and knew how the economic cycle would play out. Choose the best timing to invest given the scenario below.

Capital goods industries such as industrial equipment, transportation, and construction would be good investments at what part of the business cycle?

a.) Middle of an expansion

b.) At a trough

c.) Middle of a contraction

d.) At a peak

2.) If you believe the economy is about to come out of a recession and hits a growth period, you might change your asset allocation by selling _______ and buying ______.

a.) defensive stocks; cyclical stocks

b.) growth stocks; long-term bonds

c.) risky stocks; short-term bonds

d.) risky stocks; certificates of deposit

3.) What is true about the correlation of GDP vs Stocks/Bonds?

GDP Growth and Equity Performance are negatively correlated

GDP is postively correlated to both Stock Returns and Bond Yields

GDP is positively correlated to both Stock Returns and Bond Returns

GDP has a negative correlation to Bond Yields

4.) For each pair of firms, choose the one that you think would be more sensitive to the business cycle.

Required:

a. General Autos or General Pharmaceuticals

multiple choice 1

a.) General Autos

b.) General Pharmaceuticals

b. Friendly Airlines or Happy Cinemas

multiple choice 2

a.) Happy Cinemas

b.) Friendly Airlines

5.) Pretend you were trying to select good investments for your portfolio. You are trying to add Cyclical stocks to your portfolio. What is the best explanation of the difference betwen Cyclical stocks and Non-Cyclical (Defensive) Stocks (pretend you are explaining the difference to a high-schooler).

Multiple Choice

Cyclical Stocks are in industries/business types that do well when consumers and businesses have more discretionary income. They tend to sell much more when the economy is stronger and sell much less when the economy is weaker.

Cyclical stocks are generally consistent in terms of their sales and the strength of the economy and the economic cycle has less of an impact on their sales when compared to other firms.

6.) ______________ in interest rates are associated with stock market declines.

Multiple Choice

Increases

Decreases

Higher Slopes

7.) For the last few years the economy has been in a recession. Beginning 6-months ago, GDP is starting to grow and most economic indicators suggest that we are out of the recession and into a recovery phase.

Multiple Choice

Investors would likely rotate out of healthcare, consumer staples and healthcare stocks and rotate into auto, entertainment and fine jewelery stocks.

Investors would likely rotate out of restaurant, high-tech and retail stocks and into Alcohol, consumer staples and utility stocks

Investors would likely rotate out of cyclical stocks into defensive stocks

Investors would likely rotate out of stocks and into bonds?

8.) New Housing Starts is a ________________ indicator for GDP growth.

Multiple Choice

coincident

mixed

lagging

leading

10.) If economic conditions are such that very slow growth is expected in the foreseeable future, one would want to invest in industries with __________ sensitivity to economic conditions.

Multiple Choice

Since growth is expected to be slow, sensitivity to economic conditions is not an issue.

above-average

below-average

average

11.) 80% of a firm's costs are fixed in nature (rather than variable) and the firm finances its business primarily with debt (80% debt to invested capital). Both of these figures are much higher than the average firm in the S&P 500 Benchmark Index.

Given the scenarios presented to you below, what is likely true about this firm's earnings, returns, profits (choose the answer where both items are true).

Multiple Choice

High volatility of earnings and higher stock returns during a recovery relative to firms in the S&P 500

This firm will have a very low volatility in their stock returns and will be more profitable relative its peers

Higher volatility of earnings relative to the S&P and therefore this company will likely underperform the S&P when the economy is strong.

The firm will have low volatility of earnings and higher relative returns compared to the S&P 500 during a contraction

12.) GDP (economic growth) is expected to increase considerably. You are deciding between two equity investments, one firm has high operating leverage and the other has low operating leverage.

FIRM HIGH = High Operating Leverage

FIRM LOW = Low Operating Leverage

Which firm is likely a better investment if all else is equal between the two firms (i.e. the only difference is the amount of leverage)?

Multiple Choice

High Operating Leverage Firm

Low Operating Leverage Firm

Neither, leverage does not impact how the firm will perform in various economic conditions.

13.) We recently discussed that the Federal Reserve started purchasing Treasury Bonds in the Market. What Three things are true about this type of action by the Fed? Select the answer where all three answers are true.

Multiple Choice

The action was: a fiscal policy / a tightening policy / a form of open market operations

The action was: a fiscal policy / an easing policy / a form of open market operations

The action was: a monetary policy / an easing policy / a supply policy

The action was: a monetary policy / an easing policy / a form of open market operations

14.) Assuming that the economy is in an expansion/recovery, what types of investments would you seek out as they will expect to outperform the overall market? Select the answer where both choices are true.

Multiple Choice

1) Cyclical Stocks and

2) Stocks with higher fixed costs as part of their cost structure relative to other firms.

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1) Non-Cyclical Stocks and

2) Those with a High percent of fixed costs in their cost structure

--------------------------

1) Cyclical Stocks and

2) Those with low total debt ratio

--------------------

1) Non-Cyclical stocks and

2) Firms with a high debt to equity ratio

15.) Which of the following actions should the Federal Reserve Bank take if monetary authorities want to reduce the supply of money to slow the rate of inflation?

Multiple Choice

Increase taxes, reducing costs and causing prices to fall.

Decrease the discount rate, lowering interest rates and causing both costs and prices to fall.

Buy government bonds, reducing money supply, increasing interest rates, and slowing aggregate demand.

Sell government bonds, reducing money supply, increasing interest rates, and slowing aggregate demand.