FIN630 Gdb 1 Solution and discussion

[cyberian]

Please share fin630 GDB1 Solution SPRING 2020

[cyberian]

[zaasmi]

Please share idea

[cyberian]

@cyberian said in FIN630 Gdb 1 Solution and discussion:

“Historically, stock prices are considered as the most sensitive indicator of an economy.”

The Stock Market and the Economy
The stock market is a significant and vital part of the overall economy. If the econ-omy is weak, most companies perform poorly, as does the stock market. Conversely, if the economy is prospering, most companies do well, and the stock market reflects this economic strength. The relationship between the economy and the stock mar-ket, however, is not coincident as stock prices generally lead the economy. Histori-cally, the stock market is the most sensitive indicator of the business cycle (it is one of the leading indicators). • The market and the economy are closely related, but stock prices typically turn before the economy.

Investments Intuition
Why is the stock market a leading indicator of the economy? Basically, investors discount the future because stocks are worth the discounted value of all future cash flows. Current stock prices reflect investor expectations of the future. Stock prices adjust quickly if investor expectations of corporate profits change. Of course, the market can misjudge corporate profits, resulting in a false signal about future movements in the economy.
An alternative explanation for stock price: leading the economy involves changes in investor confidence. A change in investor confidence changes the required return in tl opposite direction. For example, an increase investor confidence reduces required return: which increases stock prices.
How reliable is this relationship between the stock market and the business cycle? While it is generally considered reliable, it is widely known that the market has given false signals about future economic activity, particularly with regard to recessions. The old joke goes something like this—“The market has predicted nine out of the last five recessions.” Recognizing that the market does not always lead the economy in the predicted manner, consider what an examination of the historical record shows: • Stock prices often peak roughly one year before the start of a recession. • The typical contraction in stock prices is 25 percent from the peak, but has been more than 40 percent. For example, in 2000-2002, the S&P 500 declined 45 percent from its peak. • The ability of the market to predict recoveries has been remarkably good. • Stock prices almost always turn up three to five months before a recovery, with four months being very typical.

[cyberian]

@cyberian said in FIN630 Gdb 1 Solution and discussion:

Please share fin630 GDB1 Solution SPRING 2020

Total Marks 4
Starting Date Friday, June 05, 2020
Closing Date Thursday, June 11, 2020
Status Open
Question Title GDB
Question Description
Discussion Question:

“Historically, stock prices are considered as the most sensitive indicator of an economy.”

Analyze the above statement by recalling the concepts studied in Fundamental Analysis (specifically in Economy/Market Analysis). Support your comments with proper conceptual rationale.

Important Instructions:

You need to analyze the given statement, which means you need to study or examine the given statement carefully in order to exlplain and interpret the rationale behind it.
Post your GDB comments against GDB rather than against lessons’ MDB.
Your discussion must be based on logical reasoning.
Your comments should not exceed 300 words.
Do not copy or exchange your comments with other students. Two identical / copied comments will be marked Zero (0) and may damage your grade in the course.
Books, websites and other reading material may be consulted before posting your comments; but copying or reproducing the text from books, websites and other reading materials is strictly prohibited. Such comments will be marked as Zero (0) even if you provide references.
Obnoxious or ignoble answer should be strictly avoided.
Questions / queries related to the content of the GDB, which may be posted by the students on MDB or via e-mail, will not be replied till the due date of GDB is over.

For detailed instructions, please view the GDB announcement.