Institutional Advisors for All Inc., or IAAI, is a consulting firm that advises foundations, endowments, pension plans, and insurance companies. The members of the research department foresee an upward trend in job creation and consumer confidence and predict that this should continue for the next few years. Other domestic leading indicators that the research department considers are industrial production, average weekly hours in manufacturing, the S\&P 500 stock index, the money supply, and the index of consumer expectations. In light of the predictions for job creation and consumer confidence, the investment advisers at IAAI want to make recommendations for their clients. They use established theories that relate job creation and consumer confidence to inflation and interest rates and then incorporate the forecast movements in inflation and interest rates into established models for explaining asset prices. Their primary concern is to forecast how the trends in job creation and consumer confidence should affect bond prices and how those trends should affect stock prices. The research department also notes that stocks have been trending up in the past year, and this information is factored into their forecasts of the overall economy. The researchers consider an upward-trending stock market a positive economic indicator in itself; however, they disagree as to the reason this should be the case. IAAI uses primarily historical data in its calculations and forecasts. Which of the following regarding the actions of IAAI is most accurate? Credit risk premiums may be useful to IAAI because they are based on actual market expectations. IAAI should use a moving average of recent stock returns when times are bad because it will result in a high expected equity risk premium. Long time spans should be used so that regime changes can be factored into the forecasts. Institutional Advisors for All Inc., or IAAI, is a consulting firm that advises foundations, endowments, pension plans, and insurance companies. The members of the research department foresee an upward trend in job creation and consumer confidence and predict that this should continue for the next few years. Other domestic leading indicators that the research department considers are industrial production, average weekly hours in manufacturing, the S\&P 500 stock index, the money supply, and the index of consumer expectations. In light of the predictions for job creation and consumer confidence, the investment advisers at IAAI want to make recommendations for their clients. They use established theories that relate job creation and consumer confidence to inflation and interest rates and then incorporate the forecast movements in inflation and interest rates into established models for explaining asset prices. Their primary concern is to forecast how the trends in job creation and consumer confidence should affect bond prices and how those trends should affect stock prices. The research department also notes that stocks have been trending up in the past year, and this information is factored into their forecasts of the overall economy. The researchers consider an upward-trending stock market a positive economic indicator in itself; however, they disagree as to the reason this should be the case. Which of the domestic series that the IAAI research department listed for use as leading indicators is least appropriate? Industrial production Average weekly hours in manufacturing The S\&P 500 index
