Bmieco

OVERALL STATS
Group Name University of Financial Success
Report Date 22-Dec-15

Number of Takers 33
Group Average 75%
Group Median 78%
Highest Score 95%
Lowest Score 35%
Best Performing Question Equities 24
Worst Performing Question Currencies 27
STATS BY MODULE
Economic Fixed
Group Name Currencies Equities
Indicators Income
Group Average 72% 75% 73% 76%
Group Median 68% 78% 76% 81%
Best Performing Question 3 1 24 24
Worst Performing Question 5 27 18 12
bloomberginstitute.com
© 2015 Bloomberg Finance L.P.

1
SCORES BY STUDENT
Score in Economic Course Completion
Name Score Score in Currencies Score in Fixed Income Score in Equities
Indicators Date
Student 1 57 42 52 67 58 26-Oct-15
Student 2 85 79 78 85 93 27-Oct-15
Student 3 77 95 93 82 56 26-Oct-15
Student 4 80 89 78 61 93 24-Oct-15
Student 5 90 89 85 91 93 24-Oct-15
Student 6 76 58 74 67 93 28-Oct-15
Student 7 81 74 33 100 100 21-Oct-15
Student 8 40 68 33 39 33 22-Oct-15
Student 9 75 95 78 64 72 21-Oct-15
Student 10 45 47 48 45 42 23-Oct-15
Student 11 69 58 85 61 70 23-Oct-15
Student 12 57 53 56 64 53 23-Oct-15
Student 13 85 68 85 85 93 27-Oct-15
Student 14 87 100 81 100 74 28-Oct-15
Student 15 75 63 70 82 79 21-Oct-15
Student 16 95 95 89 97 98 24-Oct-15
Student 17 44 47 56 55 26 23-Oct-15
Student 18 67 58 59 73 70 21-Oct-15
Student 19 35 26 33 24 49 27-Oct-15
Student 20 78 58 89 100 63 21-Oct-15
Student 21 92 89 100 76 100 28-Oct-15
Student 22 85 95 93 91 72 27-Oct-15
Student 23 78 68 81 76 81 27-Oct-15
Student 24 75 68 100 27 98 22-Oct-15
Student 25 95 100 96 94 93 22-Oct-15
Student 26 91 89 85 97 91 24-Oct-15
Student 27 81 89 96 79 70 23-Oct-15
Student 28 76 53 100 55 88 27-Oct-15
Student 29 83 68 74 91 88 27-Oct-15
Student 30 87 95 89 82 86 25-Oct-15
Student 31 57 37 59 70 56 26-Oct-15
Student 32 68 95 74 28 84 28-Oct-15
Student 33 75 63 63 85 81 26-Oct-15

2
Economic Indicators
THE PRIMACY OF GDP
1. How accurately do GDP statistics portray the economy and why?
A. Accurately because they are official numbers reported by the government

B. Inaccurately because the scope of GDP measurements can change [correct]
C. Accurately because they are quantitative not qualitative
D. Inaccurately because it is too complex to estimate
Explanation: Governments from time to time change the scope of GDP measurement, as we saw with
Nigeria and Italy. Just because they are official and numerical does not mean that they are accurate!
While undoubtedly complex, GDP is estimatable.

3
Economic Indicators
THE PRIMACY OF GDP
2. Consider the formula GDP = C + I + G + (X – M). A country is undergoing a boom in consumption

of domestic and foreign luxury goods. In one year, the dollar growth in imports is greater than the
dollar growth in domestic consumption. Assuming nothing else has changed, what happened to
GDP?
A. It went up.
B. It went down. [correct]
C. It stayed the same.
D. There is not enough information to tell.
Explanation: As imports act as a drag on GDP, the larger growth in imports offsets the growth in
consumption, thereby causing GDP to decline.

4
Economic Indicators
THE PRIMACY OF GDP
3. Here is the most important economic data for Australia and Sweden. Which economy did better
year-over-year (YOY) in the fourth quarter of 2013 compared to the fourth quarter of 2012? Use the
two charts to investigate.
(Students can scroll through both charts.)

5
A. Australia
B. Sweden [correct]
C. They performed identically.
Explanation: While Australia had higher nominal GDP growth, investors like to strip out the effects of
inflation when gauging economic health. They do this by looking at real GDP growth. In this case,
Sweden had higher real GDP growth than Australia.

6
Economic Indicators
THE PRIMACY OF GDP
Responses
A 6%
B 15%
C 3%
D 76%
4. In the United States, why is there a strong correlation between unemployment and GDP?
A. As the U.S. is a net exporter, exports go down when workers are unemployed. This is because
there are fewer workers manufacturing products for the global markets.
B. As housing accounts for 40% of GDP and as unemployed people tend to lose their homes,
GDP is depressed when unemployment rises.
C. In the U.S., government spending accounts for 18% of GDP. When unemployment rises,
governments spend more on unemployment benefits. Therefore, GDP rises.
D. Consumer spending accounts for two-thirds of the U.S. economy. When the number of
unemployed consumers rises, there is less consumer spending. [correct]
Explanation: The fact that the United States is largely a consumer economy leads to the tight
connection between U.S. unemployment and U.S. GDP. The U.S. is a net importer, not a net
exporter. Housing accounts for 40% of the inflation basket, not GDP. Government benefit payments
rise when unemployment rises. From an overall GDP perspective, however, this is more than offset
by declines in consumer spending.

7
Economic Indicators
THE PRIMACY OF GDP
5. Here is a chart showing both nominal and real GDP growth for a country. Which of the following
can be a true statement?
A. The country has inflation. The bottom line is nominal growth and the top line is real growth.
B. The country has inflation. The top line is nominal growth and the bottom line is real growth.
C. The country has deflation. The top line is nominal growth and the bottom line is real growth.
D. The country has deflation. The bottom line is nominal growth and the top line is real growth.
[correct]
Explanation: In this chart for Switzerland, the yellow line is real GDP growth. The white line is nominal
GDP growth. As nominal GDP growth is below real GDP growth at the far right-hand end of the chart,
this denotes negative inflation, i.e. deflation.

8
Economic Indicators
THE PRIMACY OF GDP
Responses
A 58%
B 12%
C 30%
D 0%
6. The white line denotes GDP growth. Which of the following lines is the best leading economic
indicator?
A. Green line [correct]

B. Yellow line
C. White line
D. Pink line
Explanation: The green line denotes the PMI Index. In the great recession starting in late 2008, PMI
fell to its low point and started to recover well in advance of GDP falling to its low point.

9
Economic Indicators
THE PRIMACY OF GDP
Responses
A 85%
B 9%
C 3%
D 3%
7. The “misery index” is often cited in the media as a way to measure consumer pain. It is defined as
the inflation rate plus the unemployment rate. Review the chart and identify the country with the
highest “misery index.”
A. Italy [correct]
B. United States
C. Sweden
D. Singapore
Explanation: The misery index numbers are, in descending order, Italy 13.3%, Sweden 8.6%, United
States 8.3%, Singapore 3.3%.

10
Economic Indicators
THE PRIMACY OF GDP
Responses
A 15%
B 64%
C 18%
D 3%
8. What type of indicators are unemployment and business confidence?
A. Unemployment is leading and business confidence is coincident.

B. Unemployment is coincident and business confidence is leading. [correct]
C. Unemployment is lagging and business confidence is coincident.
D. Unemployment is coincident and business confidence is lagging.
Explanation: As we saw, unemployment changes in line with GDP because consumer spending
accounts for the bulk of GDP. Business confidence is a leading indicator of GDP because when
businesses are confident, they invest more in the economy.

11
Economic Indicators
MONITORING GDP
Responses
A 15%
B 6%
C 76%
D 3%
9. Which of the following qualities of economic indicators do investors prize most?
A. Rigor
B. Sample size
C. Timeliness of release [correct]
D. Government sponsorship
Explanation: "New news" makes markets move. Accordingly, the economic indicators that most
quickly herald "new news" are of the most value to traders and investors.

12
Economic Indicators
MONITORING GDP
Responses
A 6%
B 15%
C 30%
D 48%
10. Why is the release of GDP statistics less interesting to investors than other indicators?
A. Because governments consistently alter their GDP measurement methods

B. Because the formula for GDP includes not only private investment but also other irrelevant
factors
C. Because GDP is not official government data
D. Because GDP statistics are released well after other economic indicators [correct]
Explanation: GDP statistics are typically released by the government a month or more after the period
in question, by which time dozens of other indicators have been released.

13
Economic Indicators
MONITORING GDP
Responses
A 9%
B 9%
C 76%
D 6%
11. Which of the following important U.S. economic indicators is only available on a quarterly basis?
A. Nonfarm payrolls
B. CPI
C. GDP [correct]
D. PMI
Explanation: PMI, CPI, and nonfarm payrolls are published monthly. GDP is only published on a
quarterly basis.

14
Economic Indicators
MONITORING GDP
Responses
A 55%
B 12%
C 12%
D 21%
12. Which economic indicator is most directly linked to unemployment?
A. Nonfarm payrolls [correct]

B. CPI
C. PMI
D. GDP
Explanation: Nonfarm payrolls is the unemployment report. CPI is inflation, PMI is business
confidence, and GDP is growth.

15
Economic Indicators
FORECASTING GDP
Responses
A 3%
B 9%
C 88%
D 0%
13. Here is the economic calendar for the United Kingdom for August 2013. Explore indicators like
PMI, house prices, industrial production, employment, retail sales, and GDP. How was performance
overall?
(Students can scroll through this calendar.)

16
A. Below expectations
B. In line with expectations
C. Above expectations [correct]
Explanation: The United Kingdom surprised the world in the second half of 2013 with the robustness
of its recovery.
• The PMI index (Markit UK PMI Manufacturing, row 21) for July registered 54.6 versus an estimate of
52.8.
• House prices (Nationwide House Px NSA YoY, row 25) rose 3.9% YoY versus an estimate of 3.1%.
• Industrial production (Industrial Production YoY, row 34) grew 1.2% YoY versus an estimate of
0.8%.
• Jobless claims (Jobless Claims Change, row 63) declined by 29,000 versus an estimated decline of
only 15,000.
• Retail sales (Retail Sales Ex Auto YoY, row 69) grew 3.1% versus an estimate of 2.7%.
• GDP (GDP YoY, row 82) for the second quarter grew 1.5% YoY versus an estimate of 1.4%.

17
Economic Indicators
FORECASTING GDP
Responses
A 6%
B 82%
C 9%
D 3%
14. This chart was captured in mid-2014. At that point in time, which of the following terms would
have described the growth predicted in this pop-out table?
A. Acceleration
B. Deceleration [correct]
C. Stagnation
D. Expansion
Explanation: China grew by 7.7% in 2013. At the time this screen was captured, it was expected to
grow by only 7.25% in 2016, meaning that analysts expected China to decelerate.

18
Economic Indicators
FORECASTING GDP
Responses
A 9%
B 6%
C 73%
D 12%
15. How have economic forecasts for this country evolved?
A. Material improvement
B. Material deterioration
C. Minimal change [correct]
Explanation: The white line represents 2014 real GDP growth forecasts. As the line is essentially
horizontal, it means that the forecasts are mostly unchanged.

19
Economic Indicators
FORECASTING GDP
Responses
A 9%
B 9%
C 70%
D 12%
16. These charts show data for four countries as of early 2016. For each country, the purple line
denotes historic real GDP growth. The white line denotes the consensus estimated real GDP growth.
The red line denotes the most pessimistic analyst forecast. The green line denotes the most
optimistic analyst forecast. For which country is there the most controversy among the analyst
community about 2016 growth?

20
A. Albania
B. Dominican Republic
C. Russia [correct]
D. Germany
Explanation: The chart for Russia displays the widest spread between the analyst estimates. The
difference between the lowest (red) and the highest (green) estimates is over 3 percentage points.
Moreover, analysts predict a continuation of current trends for the other three countries. Meanwhile,
analysts expect a reversal of recent growth trends for Russia.

21
Economic Indicators
FORECASTING GDP
Responses
A 0%
B 15%
C 21%
D 64%
17. What is the main reason that investment banks create estimates of economic indicators?
A. To determine in which countries the banks should operate

B. To increase real GDP growth by exporting their intellectual property to foreign investors
C. To hold governments accountable for management of their economies
D. To know when specific economic data points are a positive or negative surprise [correct]
Explanation: Surprises move markets, and market movements are the lifeblood of investment banks.
While a successful financial institution will benefit the GDP of its host nation, and while the creation of
economic estimates does help keep governments accountable, banks primarily exist to make money.

22
Economic Indicators
FORECASTING GDP
Responses
A 15%
B 12%
C 12%
D 61%
18. Which of the following is the biggest pitfall of economic indicators?
A. They do not take into account seasonality.

B. They are not sufficiently timely to make investment decisions.
C. They only serve as proxies for economic activity.
D. They do not consistently presage turning points. [correct]
Explanation: Investors analyze the economy through the lens of economic indicators primarily to
make money and avoid losses. When economic indicators fail to predict a turning point, which they
frequently do, investors can miss out on opportunities and/or lose money. Some economic indicators
are very timely, such as PMI. All economic indicators are proxies.

23
Economic Indicators
FORECASTING GDP
Responses
A 64%
B 6%
C 18%
D 12%
19. Here is a chart displaying economic estimates of the initial jobless claims economic indicator, one
of the main unemployment statistics in the U.S. It measures the number of new applicants for
unemployment benefits. What was the level of the analyst with the most optimistic outlook?
A. 260 [correct]
B. 274
C. 277
D. 290
Explanation: The most optimistic analyst is the analyst expecting the lowest increase in initial jobless
claims. In this case, the lowest estimate is 260.

24
Currencies
CURRENCY MARKET MECHANICS
Responses
A 94%
B 6%
1. Of the visible countries, which is the fourth biggest exporter and fourth biggest importer?
A. Japan [correct]
B. Germany
C. United States
D. China
Explanation: Looking at the bar charts around the ring, the country with the fourth highest imports (the
outwards facing bar) is Japan. And the country with the fourth highest exports (the inwards facing bar)
is also Japan.

25
Currencies
Responses
A 6%
B 70%
C 18%
D 6%
2. In 1994, the Mexican peso declined against the U.S. dollar by 37% during the so-called Tequila
Crisis. Use the article to answer this question: What exacerbating factor did Mexico's Tequila Crisis
have in common with the Argentine crisis of 2002?

26
A. Both countries use the same currency: the peso.
B. Both countries had large dollar-denominated debts. [correct]
C. Both crises occurred in December, a holiday month.
D. Both crises happened in Latin America.
Explanation: The fourth paragraph of the article cites $5.2 billion of Mexican government debt coming
due in the next five weeks. In 2002, Argentina had a total of $100 billion of debt. As we mentioned
earlier, a decline in a currency's value versus the U.S. dollar will make U.S. dollar-denominated debt
owed harder to repay.

27
Currencies
Responses
A 15%
B 9%
C 15%
D 61%
3. How many New Zealand dollars (NZD) can you buy with 100 Australian dollars (AUD)?
A. .92690
B. 1.0789
C. 92.690
D. 107.89 [correct]
Explanation: It takes 0.92690 Australian dollars, or AUD, to buy you 1 New Zealand dollar, or NZD. If
you were therefore to convert 1 AUD to NZD, you would get slightly more than 1 NZD. To calculate
how many NZD you would get for 100 AUD, take 100 and divide it by 0.92690. 100 AUD would
therefore buy you 107.89 NZD.

28
Currencies
Responses
A 79%
B 9%
C 12%
D 0%
4. Allison lives in America and has just retired. It is early 2016. She has long had dreams of going to
the top of the Eiffel Tower in France, visiting Buckingham Palace in the United Kingdom, seeing the
cherry blossoms in Japan, and cruising the fjords on the west coast of Norway. She last considered
all four options on New Year's Day 2008. She would like to select the trip to go on based on which
country's currency has subsequently weakened the most against the U.S. dollar. Where will she go
on vacation?

29
A. Norway [correct]
B. United Kingdom
C. Japan
D. France
Explanation: The Norwegian krone chart is expressed in terms of the number of Norwegian krone per
one U.S. dollar. The chart rises from approximately 5.5 to 8.4, representing a 50% strengthening of
the U.S. dollar. The U.S. dollar strengthened less against the euro and sterling. The U.S. dollar was
roughly unchanged against the Japanese yen.

30
Currencies
Responses
A 0%
B 6%
C 3%
D 91%
5. Review the four currency pair charts for the Barbadian dollar against the Jamaican dollar, the
Czech koruna against the Polish zloty, the Nigerian naira against the Ghanaian cedi, and the Hong
Kong dollar against the Macanese pataca. Which pair is pegged?

31
A. The Barbadian dollar against the Jamaican dollar
B. The Czech koruna against the Polish zloty
C. The Nigerian naira against the Ghanaian cedi
D. The Hong Kong dollar against the Macanese pataca [correct]
Explanation: The hallmark of a pegged currency pair is the absence of change in the currency pair
value. The y-axis shows that the Hong Kong dollar barely moved against the pataca. Over the period,
the naira had repeated pronounced spells of strengthening and weakening against the cedi. The
same is true of the koruna and zloty. While the Barbadian dollar and Jamaican dollar currency pair
was relatively stable, the Jamaican dollar weakened by 5% over the period.

32
Currencies
Responses
A 12%
B 9%
C 70%
D 9%
6. Which of the following is NOT an example of a failed peg?
A. British sterling in 1992

B. Mexican peso in 1994
C. Hong Kong dollar in 1997 [correct]
D. Argentine peso in 2002
Explanation: We reviewed all four currency crises in this module. The British, Mexican, and Argentine
crises all resulted in devaluations. Recall that Donald Tsang successfully defended the Hong Kong
dollar peg.

33
Currencies
Responses
A 6%
B 70%
C 6%
D 18%
7. Use the chart below to answer the question. How many Danish crowns (DKK) will buy 100
Japanese yen (JPY)?
A. 0.05360
B. 5.360 [correct]
C. 18.656
D. 1865.6

34
Explanation: If we look at the JPY row, we see that it takes 18.656 Japanese yen to buy 1 Danish
crown. Therefore, 100 Japanese yen will buy (100 / 18.656), or 5.360 Danish crowns. We could also
have arrived at the same answer by seeing that it takes 0.0536 Danish crowns to buy 1 Japanese
yen. Hence, (100 * 0.0536). 5.360 Danish crowns would buy 100 Japanese yen.

35
Currencies
CURRENCY VALUATION
Responses
A 6%
B 70%
C 6%
D 18%
8. According to this Big Mac index screen, which of the following countries' currency is the most
undervalued?
A. United States
B. China [correct]
C. Brazil
D. Thailand
Explanation: An undervaluation is listed as a negative percent in the far right column. Of the four
options, China has the largest negative number.

36
Currencies
CURRENCY VALUATION
9. What generally happens when a central bank unexpectedly increases interest rates?
A. The currency strengthens. [correct]

B. The currency weakens.
C. The currency strengthens, then weakens.
D. The currency weakens, then strengthens.
Explanation: When a central bank increases interest rates, the government bond yields rise. This
attracts investment from around the world, spurring demand for that country’s currency. The currency,
therefore, typically strengthens.

37
Currencies
CURRENCY VALUATION
10. Which driver weakened the Swiss franc from one euro per Swiss franc to 0.83 euro per Swiss
franc?
A. A surprise change in inflation expectations [correct]

B. A surprise change in valuation expectations
C. A surprise change in interest rates expectations
D. A surprise change in trade deficit expectations
Explanation: When a central bank threatens to print a lot of money, the exchange rate will tend to
depreciate. This is due to a surprise change in inflation expectations as printing money is inherently
inflationary.

38
Currencies
CURRENCY VALUATION
Responses
A 15%
B 79%
C 6%
D 0%
11. What does the Big Mac index show?
A. How the law of one price is true of consumer products

B. How currencies may be overvalued or undervalued [correct]
C. How interest rates and inflation affect trade
D. How The Economist magazine estimates inflation
Explanation: The Big Mac index uses the prices of Big Macs around the world compared to the price
of a Big Mac in the U.S. as a proxy for currency valuation.

39
Currencies
CURRENCY VALUATION
12. What are the three main short-term drivers of currency valuation?
A. Surprise changes in interest rates, inflation, and gold

B. Surprise changes in interest rates, inflation, and trade [correct]
C. Surprise changes in unemployment, inflation, and trade
D. Surprise changes in unemployment, trade, and gold
Explanation: When the government changes interest rates, this action changes the attractiveness of
the bonds of that government. This typically leads to cross-border money flows either into or out of
that country. Inflation erodes the purchasing power of a currency; therefore, it can have a powerful
effect on currency valuation. Cross-border trade directly influences currency transactions; therefore,
changes in trade will alter the demand for a currency. Surprise changes in unemployment may lead to
a shift in monetary policy. Unemployment is therefore important to currency valuation only insofar as
it leads to surprise changes in interest rates. The gold standard no longer exists, meaning currencies
are no longer pegged to gold.

40
Currencies
CURRENCY VALUATION
Responses
A 70%
B 18%
C 6%
D 6%
13. By what mechanism do interest rates affect currency values?
A. Global investors are attracted by higher bond yields in high interest rate countries. [correct]
B. Changes in interest rates directly influence the value at which a currency is pegged.
C. High interest rates increase the value of house prices which make the currency safer.
D. Low interest rates always make a market more attractive for investors, which lifts the currency.
Explanation: International investors frequently seek the countries with elevated government bond
yields. When they buy these bonds, they must buy the domestic currency, which lifts the value of that
currency.

41
Currencies
CURRENCY VALUATION
Responses
A 70%
B 9%
C 12%
D 9%
14. Which of these headlines could move a currency pair?
A. U.S. Stocks Rally on Fed's Surprise Reduction of Discount Rate [correct]

B. Railroad Rate Hikes Drive Dichotomy of Necessary vs. Excessive
C. Hong Kong ‘Firmly Committed’ to Dollar Peg, John Tsang Says
D. Grade Inflation: Devaluing B-Schools' Currency
Explanation: Surprise changes in interest rates, inflation, and trade tend to move currency pairs. The
only article on one of these topics concerns a surprise Fed change in the interest rate.

42
Currencies
CENTRAL BANKS AND CURRENCIES
Responses
A 9%
B 73%
C 15%
D 3%
15. What is the most common target inflation rate for an advanced economy?
A. 1%
B. 2% [correct]
C. 3%
D. 0%
Explanation: The typical target inflation rate for a developed economy is about 2%. For example, the
U.S., Japan, the U.K., and Canada all target 2% inflation.

43
Currencies
Responses
A 9%
B 6%
C 76%
D 9%
16. What was the primary goal of Abenomics?
A. To reduce inflation by increasing unemployment

B. To help Shinzo Abe win the election of 2012
C. To halt the vicious cycle of deflation [correct]
D. To strengthen the yen to foster consumption of luxury goods
Explanation: After the Japanese stock market peaked in 1990, Japan entered a vicious deflationary
cycle over the subsequent two decades. Abenomics was an attempt to break that cycle by weakening
the yen to spur inflation and boost exports.

44
Currencies
Responses
A 3%
B 12%
C 9%
D 76%
17. Here is the vicious deflationary cycle. What step connects the lower left gray arrow to the upper
right blue arrow?
A. Workers expect prices to increase

B. Workers demand pay increases
C. Employment declines
D. Prices decline [correct]
Explanation: When fewer people work, consumer spending declines. This prompts companies to drop
prices in order to stimulate demand.

45
Currencies
Responses
A 18%
B 73%
C 9%
D 0%
18. Was the Great Depression in the U.S. linked to inflation or deflation?
A. Inflation
B. Deflation [correct]
C. Both inflation and deflation
D. Neither inflation nor deflation
Explanation: The Great Depression of the 1930s followed the rampant consumption and speculation
of the 1920s. Businesses and consumers were forced to pay off debt, which eroded spending in the
economy. This led to price declines.

46
Currencies
CURRENCY RISK
Responses
A 3%
B 6%
C 91%
D 0%
19. Why is there a mirror image between the yen weakness and stock market strength on the chart
shown?
A. Rising Japanese interest rates both weaken the yen and lift the stock market.
B. A declining yen will lift inflation, which is good for Japanese corporations.
C. Yen weakness favors the many exporting corporations within the index. [correct]
D. Stock market strength pushes Japanese investors to buy safe haven currencies.
Explanation: A weaker yen enables Japanese manufacturers to sell more units of their products to
foreigners, driving the manufacturers' earnings. Rising Japanese interest rates would tend to
strengthen the yen. Corporations tend to dislike inflation.

47
Currencies
CURRENCY RISK
Responses
A 70%
B 9%
C 12%
D 9%
20. In early 2016, the same Germany machinery company has interest from four prospective clients
from emerging markets Brazil, Indonesia, Russia, and South Africa. They all want to buy ten
machines. The company will bill them in euros but the CFO is worried that the client may cancel the
order if his currency declines when the invoice comes due on June 30, 2016. According to historical
currency volatility alone, the client from which country would be most likely to pay his invoice?

48
A. Indonesia [correct]
B. Brazil
C. Russia
D. South Africa
Explanation: 15,212.11 Indonesian Rupiah buys 1 euro (middle of the range). The blue line on the
right-hand side is at 16,511.40. If the currency moves one standard deviation, the shift would be as
follows: (16,511.40 – 15,212.11) / 15,212.11 = 8.5%. This means that there is a reasonable chance
that the Indonesia Rupiah may weaken by 8.5% over the coming months.
A similar analysis on the other three currency pairs shows that South Africa, Brazil and Russia have
13%, 14% and 16% changes, respectively. The Indonesian Rupiah is therefore the least volatile
against the euro.

49
Currencies
CURRENCY RISK
Responses
A 82%
B 15%
C 3%
D 0%
21. What is the median estimate for the number of U.S. dollars per British sterling for calendar year
2015?
A. 1.61 [correct]
B. 1.63
C. 1.66
D. 1.75
Explanation: What is the median estimate for the number of U.S. dollars per British sterling for
calendar year 2015?

50
Currencies
CURRENCY RISK
Responses
A 6%
B 3%
C 3%
D 88%
22. What is the difference between Citigroup and JPMorgan Chase’s estimate for the U.S.
dollar/British sterling currency pair for the end of Q1 2015?
A. 0.16 pounds
B. 0.16 euros
C. 0.16 percent
D. 0.16 dollars [correct]
Explanation: The difference between the two numbers (1.76 – 1.60) is 0.16. The question asks for the
denomination. As it takes more than 1 dollar to buy 1 pound, we can deduce that the currency pair is
being expressed in dollars per sterling. Therefore, the units are expressed in dollars.

51
Currencies
CURRENCY RISK
23. You are a Dutch diamond dealer who sources diamonds from South Africa. You believe that the
African continent is set to boom, and so you believe that the South African rand will strengthen
against the world’s major currencies. Therefore, you are worried about your ability to afford South
African diamonds in the future.
A new mine is being dug in South Africa and you have agreed with the miner to buy 1 million South
African rands' worth of diamonds a year from today. Therefore, you will need 1 million rands in cash
in one year’s time. Currently, the exchange rate is 17.1261 rands to the euro. You believe that the
rand will strengthen to 16 rand to the euro in one year’s time. You speak to some currency dealers
and they let you know that they would agree today to convert your euros into rands in one year’s time
at the rate of 18.654182.
Assume that you converted some of your euros into 1 million rands at today’s prevailing rate and
stored the rands in a safe. How many more or fewer euros would you have in one year’s time if you
were to agree today to the forward agreement instead of simply purchasing the million rands today?

52
A. EUR 4,783 more [correct]
B. EUR 4,783 less
C. EUR 4,110 more
D. EUR 4,110 less
Explanation: Today, 1,000,000 rands will cost you (1,000,000 / 17.1261) = EUR 58,390.
If you take the forward agreement, 1,000,000 rands would cost you (1,000,000 / 18.654182) = EUR
53,607.
Therefore, if you took the forward agreement instead of changing the money today, you would have
(EUR 58,390 – EUR 53,607) = EUR 4,783 more.

53
Currencies
CURRENCY RISK
Responses
A 76%
B 15%
C 9%
D 0%
24. Why would Jack Welch suggest putting all company plants on barges?
A. To respond to the changes in the currency market quickly [correct]

B. To avoid using any domestic currencies
C. To locate the cost base in the most favorable tax regimes
D. To purchase materials for the plant more quickly
Explanation: Jack Welch was referring to the problems that currency fluctuations inflict on global
manufacturing corporations. Were all his plants to be on barges, he could move his manufacturing
facilities away from countries with strong currencies to countries with weak currencies, thereby
making the goods cheaper to buyers and so maximizing his profit.

54
Currencies
CURRENCY RISK
Responses
A 6%
B 15%
C 15%
D 64%
25. Samsung is based in South Korea and reports in South Korean won. Samsung sells its products
around the world and the geographic breakdown of its 2015 revenues are in the first chart. The
second chart shows how some major world currencies moved against the South Korean won through
the course of 2015. Of the currencies shown, which currency movement held back Samsung's
revenue growth the most?

55
A. Yuan
B. Dollar
C. Real
D. Euro [correct]
Explanation: Latin America is not included in the revenue breakdown table therefore we can assume
that the Brazilian real/South Korean won currency pair is irrelevant. Of the remaining three currency
pairs, only the euro weakened against the South Korean won during 2015. This is apparent because
the number of won to buy one euro went down. This movement would have partially held back
Samsung's reported European revenue growth in terms of South Korean won.

56
Currencies
CURRENCY RISK
Responses
A 3%
B 18%
C 3%
D 76%
26. Legendary investor Warren Buffett said, “Gold gets dug out of the ground... Then we melt it down,
dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone
watching from Mars would be scratching their head.” Based on this quotation, what quality of gold is
he referring to?
A. Its durability
B. Its scarcity
C. Its physical attractiveness
D. Its storage costs [correct]
Explanation: So-called gold bugs adore the durability, scarcity, and physical attractiveness of gold
along with many other qualities of the metal. Warren Buffet tends to invest in equities, especially into
those paying a healthy dividend. Gold effectively pays a negative dividend as one has to pay people
to guard it. Buffett is here highlighting one of the least attractive features of gold as an investment.

57
Currencies
CURRENCY RISK
27. Of the following options, what is the best way for investors to manage currency risk?
A. By locking in forward rates for known foreign payments [correct]

B. By investing in pegged currencies
C. By investing purely in very large stocks in their home market
D. By vacationing each year in a country with a weak currency
Explanation: We reviewed how investors can lock future currency transactions. Pegged currencies
have a dangerous habit of crashing. Big companies can operate in multiple countries.

58
Fixed Income
THE ROOTS OF THE BOND MARKET
Responses
A 9%
B 6%
C 6%
D 79%
1. What does it signify when the bars are green at the bottom?
A. Deficit
B. High revenue
C. Growth
D. Surplus [correct]
Explanation: When tax revenue (the white line) exceeds budgetary outlay (the orange line), the
government is taking in more tax than it is spending, causing a budget surplus. The bottom chart
shows the budget surplus (green) or deficit (red).

59
Fixed Income
Responses
A 67%
B 24%
C 3%
D 3%
2. According to the table on the right, which country owns 2.9% of U.S. debt?
A. Belgium [correct]
B. Taiwan
C. United Kingdom
D. Switzerland
Explanation: This pie chart breaks down the $6T of U.S. debt held by foreign owners. Total U.S. debt
is $12.5T, as we just learned. 2.9% of $12.5T is $362B.The only country on the table with $362B of
debt is Belgium.

60
Fixed Income
Responses
A 3%
B 3%
C 6%
D 85%
3. What quality of U.S. government bonds causes investors to buy them when market volatility rises?
A. U.S. government bonds are denominated in dollars.

B. U.S. government bonds are stored in bank vaults.
C. U.S. government bonds are unwritten by global taxpayers.
D. U.S. government bonds are considered low risk. [correct]

61
Explanation: U.S. government bonds are considered one of the world's main safe havens for
investors because they are backed by U.S. taxpayers and the U.S. government ultimately could print
money to repay them. The mere fact that an investment is denominated in dollars does not make it
safe.

62
Fixed Income
4. Why is fixed income called fixed income?
A. Because bonds cannot rise in price over the life of a bond

B. Because the repayment amounts and timings are fixed for ordinary bonds [correct]
C. Because current and future owners of a bond get the same effective annual interest rate
D. Because the price of the bond is fixed, given the safe haven nature of bonds
Explanation: An ordinary bond has a rigid schedule of the repayment amounts and timings of those
repayments. The price of the bond, however, is determined in the marketplace and can go both up
and down. When a bond is bought at a new price, it leads the new owner to receive a different annual
effective interest rate.

63
Fixed Income
Responses
A 12%
B 24%
C 52%
D 12%
5. Which is the biggest??
A. World GDP
B. World total stock market value
C. World total bond market value [correct]
D. World total currency reserves

64
Explanation: We saw earlier that world GDP is $72T and that world currency reserves are $12T. We
also saw that the bond market at $100T dwarfs the equities market which is a $64T market.
Therefore, the bond market is the biggest of the four.

65
Fixed Income
Responses
A 15%
B 67%
C 18%
D 0%
6. What is one reason why foreign governments lend to the U.S. government?
A. To enhance diplomatic relations

B. To build liquid FX reserves [correct]
C. To benefit from the price and yield going up
D. To pay for the U.S. budget deficit
Explanation: Many countries feel the need to have large FX reserves and U.S. government bonds are
suitably liquid for this purpose. Governments do not buy U.S. government bonds to enhance
diplomatic relations. While foreign governments do, in effect, cover the U.S. budget deficit, they
expect to get paid back with interest. Bond prices move inversely to bond yields.

66
Fixed Income
Responses
A 73%
B 9%
C 18%
D 0%
7. What does one yellow bar depict in this debt distribution diagram?
A. Coupon repayment [correct]

B. Principal repayment
C. Yield repayment
D. Distribution repayment
Explanation: The yellow bars represent coupon repayments and the blue bar represents the single
principal repayment at the end of the life of the bond.

67
Fixed Income
Responses
A 15%
B 6%
C 9%
D 70%
8. Which one of the following actors benefits when interest rates go up?
A. A company with a fixed-rate loan

B. A company about to secure a fixed-rate loan
C. An investor who already owns bonds
D. An investor who is about to buy bonds [correct]

68
Explanation: When interest rates go up, bond yields go up, meaning bond prices go down. An
investor who now buys bonds will benefit from lower-priced, higher-yielding bonds. A borrower with a
fixed-rate loan will be unaffected by interest rate movements as the interest rate is locked. A company
about to secure a loan will suffer from a higher interest rate on that loan.

69
Fixed Income
BOND VALUATION
9. When investors doubt the creditworthiness of a borrower, how do they alter their calculation of the
bond yield to take into account these doubts?
A. Investors do not alter the calculation. [correct]

B. Investors exclude future repayments they think will not occur.
C. Investors add the percent likelihood of bankruptcy to the yield.
D. Investors decrease the price by the percent likelihood of bankruptcy.
Explanation: They do not alter their calculation. As yield compares repayments to the price of a bond,
and as the price will probably be very low, the yield will probably be very high. When calculating yield,
investors never exclude future promised payments, no matter how unlikely they are to materialize.

70
Fixed Income
BOND VALUATION
10. As a general rule, what percentage of debt to GDP will make a government’s bond yields spike?
A. 50%
B. 90%
C. 150%
D. There is no general rule. [correct]
Explanation: As a general rule, a higher debt burden will increase the risk of bonds. For higher risk,
investors will demand a higher return in the form of an elevated yield. There is, however, no rule of
thumb on when bond yields will spike. Japan is one of the most heavily indebted nations in the world,
yet it has one of the lowest government bond yields.

71
Fixed Income
BOND VALUATION
Responses
A 12%
B 82%
C 0%
D 3%
11. What is true of both the U.K. and the U.S.?
A. Both countries print world reserve currencies.

B. Both countries are highly creditworthy. [correct]
C. Both currencies are used equally in the world FX markets.
D. Both are heavily reliant on long-term borrowing.

72
Explanation: The U.S. dollar is the world’s reserve currency, which is involved in 85% of all currency
trading. The bulk of U.K. government borrowing is long-term while the bulk of U.S. government
borrowing is short-term. Both the U.S. and the U.K., however, have strong reputations for
creditworthiness.

73
Fixed Income
BOND VALUATION
12. Which would you prefer?
A. A 3% annual yield on an investment in 10-year U.S. government bonds

B. A 4% annual yield on a risk-free 10-year government bond from the mythical country of Utopia
[correct]
C. A 2% annual yield on an investment in 10-year U.S. government bonds
D. A 3% annual yield on a risk-free 10-year government bond from the mythical country of Utopia
Explanation: Both U.S. government bonds and Utopian government bonds are risk-free. All four
should in theory offer the same reward: yield. If they do not, then the one offering the highest yield is
in effect a “free lunch.” Opt for the bond with the highest yield.

74
Fixed Income
BOND VALUATION
13. Which would you prefer?
A. A 5% annual yield on an investment in 10-year U.S. government bonds [correct]

B. A 3% annual yield on a risk-free 10-year government bond from the mythical country of Utopia
C. A 4% annual yield on an investment in 10-year U.S. government bonds
D. A 2% annual yield on a risk-free 10-year government bond from the mythical country of Utopia
Explanation: When the risk is the same, investors should prefer the bond with the higher yield.

75
Fixed Income
BOND VALUATION
Responses
A 3%
B 73%
C 15%
D 9%
14. What is the primary reason for U.S. government bond yields to ripple through the bond market?
A. Bond prices move in lockstep in order for the yields to match government bond yields.
B. The large government bond market competes for investors’ attention via yields. [correct]
C. All governments mandate interest rates as part of their economic policy.
D. Non-government borrowers are slightly less safe and therefore must offer slightly lower yields.

76
Explanation: Bond yields move when bond prices move. As bond investors compare bonds based on
their yields, and as government bonds are the largest part of the bond market, the yields on
government bonds will compete for investors’ attention against the yields on all other bonds.

77
Fixed Income
BOND VALUATION
Responses
A 70%
B 15%
C 9%
D 6%
15. A rise in which of the following measures would typically send a government bond price up?
A. Creditworthiness [correct]
B. Inflation
C. Interest rates
D. Government borrowing
Explanation: When investors become more comfortable that a borrower can repay, the risk and
therefore the yield on the bond tend to go down, meaning that the price tends to go up. A rise in
inflation and interest rates typically sends yields up and prices down, as we saw. There is less of a
connection between the level of government borrowing and the yield on a government bond.

78
Fixed Income
BOND VALUATION
Responses
A 9%
B 6%
C 64%
D 21%
16. Which of the countries shown makes the greatest relative use of short-term government
financing?

79
A. Australia
B. Switzerland
C. Norway [correct]
D. Germany
Explanation: Norwegian government debt will be completely paid off by 2026. Australian government
debt will be fully paid off by 2040, while both German and Swiss government debt will be fully paid off
beyond 2046.

80
Fixed Income
BOND VALUATION
Responses
A 9%
B 9%
C 6%
D 76%
17. How do investors compare bonds?
A. By comparing the total amounts of principal and interest outstanding

B. By comparing the prices of single bonds
C. By comparing the total amounts borrowed to the repayment amounts
D. By comparing the yields [correct]
Explanation: Bonds come in all shapes and sizes. The annual yield is derived from the amount still
repayable and the bond price. Both are themselves inputs to the yield number. The resulting yield is
the only number that facilitates apples-to-apples comparison.

81
Fixed Income
CENTRAL BANKERS AND INTEREST RATES
18. Which of the following is the strongest driver of inflation?
A. Consumers deferring purchases in hopes of a better deal

B. Wartime activities [correct]
C. A rise in the price of gold
D. High interest rates
Explanation: War fosters scarcity, which is inherently inflationary. Consumers deferring purchases is
deflationary. Gold sometimes rises in response to inflation, but this rise in gold does not cause
inflation. High interest rates are commonly used to combat high inflation.

82
Fixed Income
Responses
A 70%
B 18%
C 3%
D 9%
19. This chart shows the output gap in the U.S. as of the end of 1973. What was likely the Fed
interest rate policy at the end of 1973?
A. To maintain high interest rates and be vigilant about inflation [correct]

B. To maintain low interest rates and be vigilant about inflation
C. To maintain high interest rates and be vigilant about deflation
D. To maintain low interest rates and be vigilant about deflation

83
Explanation: In 1973, as the U.S. actual GDP (yellow line) was above potential GDP (white line),
there was a positive output gap and "the porridge was hot." Inflation had risen to over 8% and the
Federal Reserve had hiked rates to 9%. The Fed was maintaining high interest rates and was fixated
on inflation.

84
Fixed Income
Responses
A 15%
B 15%
C 64%
D 6%
20. Here is a chart from the ILBE function displaying U.S. 10-year inflation expectations as of early
2016. At the point in time shown, where is the country's 10-year inflation expectation in relation to the
Central Bank's inflation target?
A. 1.5733% above
B. 0.5733% above
C. 0.4267% below [correct]
D. 1.4267% below
Explanation: As we saw earlier, the inflation target for the U.S. is 2%. Therefore, the current inflation
expectation of 1.5733% is 0.4267% below the target.

85
Fixed Income
Responses
A 15%
B 12%
C 9%
D 64%
21. Investors who fear rising inflation may buy Treasury Inflation Protected Securities (TIPS). How do
TIPS shield lenders from inflation?
A. By disbursing gold bullion

B. By offsetting the inflation with deflation
C. By triggering an insurance payout
D. By compensating investors for inflation [correct]
Explanation: TIPS compensate the lender in the event of inflation, using CPI as a guide.

86
Fixed Income
Responses
A 64%
B 12%
C 6%
D 18%
22. What is the Federal Reserve's favorite inflation gauge?
A. Core PCE [correct]

B. GDP deflator
C. CPI
D. Household income
Explanation: Core personal consumption expenditure is the favorite inflation gauge of the Federal
Reserve. The Consumer Price Index and the GDP deflator are both affected by volatile food and
energy prices and are therefore deemphasized. Household income is not in itself an inflation gauge.

87
Fixed Income
Responses
A 3%
B 3%
C 15%
D 79%
23. Here is the output gap in the U.S. in early 1975. What was likely the Fed interest rate policy?
A. To maintain high interest rates

B. To maintain low interest rates
C. To hike interest rates
D. To cut interest rates [correct]

88
Explanation: In 1975, U.S. actual GDP (yellow line) was declining well below potential GDP (white
line), meaning there was a growing negative output gap. At the onset of this recession, the Federal
Reserve was aggressively cutting interest rates, which had reduced from 9% in late 1974 to 5.5% at
the time the chart shows.

89
Fixed Income
THE YIELD CURVE AND WHY IT MATTERS
Responses
A 3%
B 97%
C 0%
D 0%
24. Why does the yield curve naturally slope upwards?

A. To offer investors increased bond prices over time as represented by the rising line
B. To compensate lenders for the greater risk of long-term loans compared to short-term loans
[correct]
C. To pay investors for the risk of deflation
D. To attract bond traders who typically prefer long-term bonds
Explanation: When you lend somebody money for a long period of time, there is a greater chance that
the borrower will go bust or that inflation will rise as compared to lending money for a short period.
Lenders therefore demand a greater return (that is, a higher bond yield) as compensation for the
greater risk. This is why yields at the far right of the yield curve tend to be higher than yields at the far
left to compensate for credit risk and inflation risk.

90
Fixed Income
Responses
A 76%
B 0%
C 15%
D 9%
25. Why did the corporate spread significantly widen during the 2008 market crash?
A. Corporate bond issuers go bankrupt more frequently than governments, as they do not have a
tax base to fall back on in hard times. [correct]
B. Corporate bonds went up as investors rotated out of equities into all forms of safer bonds.
C. Corporations were viewed as safer than governments; therefore, the corporate bonds went up
and the government bonds went down.
D. A slowdown in economic activity led to fears of rising inflation.

91
Explanation: In 2008, investors were worried about the recession sending companies into bankruptcy
and the threat of deflation. This sent corporate bond prices down and so yields up. The same worries
spurred investors to seek out investments with no credit risk, such as U.S. government bonds. This
sent the price of such bonds up and so yields down. These two effects drove a sharp divergence
between corporate and government bond yields.

92
Fixed Income
Responses
A 13%
B 75%
C 0%
D 13%
26. What impact will a tightening of the corporate spread most likely have on a company?
A. A tendency to restrict the borrowing capacity of the company

B. A tendency to expand the borrowing capacity of the company [correct]
C. A tendency to make borrowing more expensive
D. A tendency to make the company more prone to bankruptcy
Explanation: A tightening corporate spread is a vote of confidence in the company. It will make the
cost of borrowing come closer to that of the risk-free borrowing of the government. This enhances the
company’s ability to borrow.

93
Fixed Income
Responses
A 13%
B 16%
C 65%
D 6%
27. The U.S. yield curve affects which of the following entities?
A. All large companies worldwide and the U.S. government

B. All large U.S. companies and all governments worldwide
C. All large companies and all governments worldwide [correct]
D. All large U.S. companies and the U.S. government
Explanation: The U.S. yield curve represents the largest single part of the world bond market. It is
priced in U.S. dollars, the main currency in the world, and is one of the most liquid parts of the world's
financial markets. Accordingly, all other government bond markets around the world are viewed

94
relative to the U.S. government bond market. As interest rates affect economies, borrowing
conditions, and company valuations, all companies and all governments worldwide are affected in
some way by the U.S. yield curve.

95
Fixed Income
Responses
A 16%
B 13%
C 65%
D 6%
28. What is the 10-year to 3-month term premium of the following yield curve?
A. 2.421%
B. 0.023%
C. 2.398% [correct]
D. 2.332%
Explanation: The table at the bottom of the chart provides the yield at various points in time along the
yield curve. If we take the difference (the spread) between the 10Y yield of 2.421% and the 3Y
yield of 0.023%, we get the 10Y-3Y term premium. 10Y yield – 3M yield = 2.421% – 0.023% =
2.398%

96
Fixed Income
Responses
A 10%
B 13%
C 61%
D 16%
29. Which of these purchases is most likely to be affected by interest rates?
A. A safari
B. A yacht
C. An automobile [correct]
D. An undergraduate university degree

97
Explanation: Consumers often borrow money to pay for a new car. The interest rate on the loan will
be affected by prevailing interest rates. A safari costs the least of the four items and is therefore more
likely to be paid for out of savings. Additionally, banks are less willing to loan money for vacations as
there is nothing to sell should the borrower go bankrupt. Yachts are typically purchased by the rich
and super rich, who have less need to borrow money to make big purchases. Given that students
tend to start undergraduate degrees at a certain stage of life, elevated interest rates will typically not
deter students from attending a university at that time, although they may lead to greater interest in
cheaper programs.

98
Fixed Income
MOVEMENTS IN THE YIELD CURVE
Responses
A 10%
B 74%
C 13%
D 3%
30. What is the primary driver of the left-hand end of the yield curve?
A. Inflation
B. Central bank interest rates [correct]
C. GDP growth estimates
D. Bond trading
Explanation: The far left of the yield curve is linked to the overnight interest rate of the central bank.
This means that it is closely linked to the central bank’s base interest rate.

99
Fixed Income
Responses
A 19%
B 65%
C 6%
D 10%
31. Which yield curve is most likely linked to a booming economy?
A. A
B. B [correct]
C. C
D. D

100
Explanation: When the economy is booming, investors expect rates to go up in order to rein in
inflation. The right-hand end of the yield curve will immediately reflect this with higher yields while the
left-hand end will remain trapped in the present with the current lower level of rates. Therefore the
yield curve will be steep. Looking at the y-axes of each chart reveals the yield curve with the highest
10-year to 2-year term premium.

101
Fixed Income
Responses
A 13%
B 13%
C 10%
D 65%
32. The two yield curves in the chart are from September 10, 2001 (yellow line) and from October 10,
2001 (green line). What do you think the Federal Reserve did with interest rates in the month
following the terrorist attacks of September 11, 2001?
A. Steepened the interest rates

B. Kept interest rates the same
C. Increased interest rates
D. Cut interest rates [correct]

102
Explanation: In the month after the terrorist attacks of September 11, the Federal Reserve cut rates
twice by 50 basis points in order to calm the financial markets. This explains why the left-hand end of
the yield curve went down by a full percentage point over the month.

103
Fixed Income
Responses
A 3%
B 10%
C 3%
D 84%
33. Why does the yield curve tend to invert shortly before a recession?
A. Recessions tend to send prices down and this includes the price of term premiums.
B. The fact that the yield curve inverted before many recessions in recent history is purely
coincidental.
C. The term premium tends to be very positive before a recession due to impending interest rate
hikes.
D. An inverted yield curve means that bond traders are predicting interest rate cuts, and interest
rate cuts happen in response to a recession. [correct]

104
Explanation: The bond market is the largest market in the world. As the bond market is the forum
where investors place bets on the future direction of interest rates, bond investors fixate on the
central bank to guess its next move. Large institutional money managers devote heavy resources to
this guessing game. The yield curve can therefore be thought of as the “wisdom of the crowd.”

105
Equities
INTRODUCING THE STOCK MARKET
Responses
A 3%
B 6%
C 3%
D 88%
1. Why do companies do IPOs?
A. When companies go bankrupt, they must delist.

B. Company management gets to ring the bell on the stock exchange floor.
C. Companies with revenue above a certain threshold must be publicly listed by law.
D. IPOs incentivize entrepreneurs to innovate as it provides a way for them to monetize their
work. [correct]
Explanation: IPOs are a way for entrepreneurs to monetize their investment and hard work. This
incentivizes entrepreneurialism. Delisting is the opposite of doing an IPO. There is revenue threshold
above which a company must do an IPO.

106
Equities
Responses
A 6%
B 6%
C 27%
D 61%
2. Why do company manager-owners smile when they ring the stock exchange bell at their IPO?
A. Manager-owners receive their first stake in the company at an IPO.

B. Money raised from an IPO solely compensates manager-owners.
C. Manager-owners are freed of the burden of managing their company.
D. An IPO crystallizes the value of the manager-owners' stake. [correct]
Explanation: An IPO puts a dollar value on the manager-owners' stake, demonstrating what their hard
work and investment is worth. A manager-owner may be selling a stake in the company at the IPO,
but not necessarily. Equally, the company may just be raising funds for expansion. It would be
profoundly odd for a manager-owner to ring the bell on his or her last day as the company would be
losing a leader at the time when the ownership is changing.

107
Equities
Responses
A 6%
B 70%
C 21%
D 3%
3. Here are 22 of the 30 members of the Dow Jones Industrial Average Index as of late March 2015.
If all the shares went up by 5%, which share on the screen shown would have the biggest contribution
to an upward movement in the Index?
A. General Electric
B. Goldman Sachs [correct]
C. Apple
D. Exxon Mobil

108
Explanation: The Dow Jones Industrial Average Index has an unusual weighting methodology. Unlike
the S&P 500, it is weighted by share price, not by market cap. The company with the highest share
price shown on this screen is Goldman Sachs. Apple has the highest market cap on this screen –
$742B. Apple’s share price is far lower than that of Goldman Sachs, however.

109
Equities
Responses
A 0%
B 9%
C 15%
D 76%
4. In 1999, James Glassman and Kevin Hassett published a book called “Dow 36,000.” At the time,
the Dow Jones Industrial Average Index was just under 12,000. Which of the following is a potential
substitute for the book title?
A. "The Total Market Cap of the Stock Market Will Go Down 36,000 Points"
B. "The Average Retirement Account of an Industrial Worker Will Triple"
C. "The Sum of the Market Caps of All 30 Dow Jones Members Will Triple"
D. "The Sum of the Share Prices of All 30 Dow Jones Members Will Triple" [correct]
Explanation: The Dow Jones Industrial Average index is calculated by adding together the share
prices of the 30 constituent companies.

110
Equities
5. Here is a chart of the index value for the S&P 500 and the United Kingdom’s main equity index, the
FTSE 100, from the end of 2008 to early 2015. One has clearly outperformed the other. Over this
period, there was a technology boom and an oil crash. Here are pie charts showing the early 2015
index compositions by industry for both the S&P 500 and the FTSE 100. Which index outperformed?
Index Values for S&P 500 and FTSE 100

111
S&P 500 Index Compositions FTSE 100 Index Compositions
A. The S&P 500 Index [correct]

B. The FTSE 100 Index
C. The U.K. Index
D. The WEI Index
Explanation: As of early 2015, energy stocks accounted for about 14% of the FTSE 100 but only 8%
of the S&P 500. Technology stocks accounted for only 4% of the FTSE 100 but 20% of the S&P 500.
Therefore the technology boom was a tailwind for the S&P 500 while the oil crash was a headwind for
the FTSE 100. The S&P 500 therefore outperformed the FTSE 100.

112
Equities
THE NATURE OF EQUITIES
6. What is the prime reason that Jenny's discretionary income is more volatile than her salary?
A. Her tax rate remains 30%.

B. Her mortgage payments and necessities are fixed. [correct]
C. Her discretionary income and salary are equally volatile.
D. Her cost of living is affected by high inflation in the neighborhood.

113
Explanation: When Jenny's salary changes but her mortgage payment and necessities do not, the
part of her income that is left over will change by a greater percentage simply because it is a lower
number to begin with. The fact that the tax rate remains the same means that tax actually dampens
the volatility of her discretionary income because the greater her salary, the greater her offsetting tax
bill. Inflation affects her purchasing power and may affect her pay rises, but not the breakdown of the
budget itself.

114
Equities
7. A wedding planning company has a high fixed-cost base and a lot of debt. Who would you rather
be?
A. A shareholder in a booming economy [correct]

B. A shareholder in a stagnant economy
C. A bond holder in a booming economy
D. A bond holder in a stagnant economy
Explanation: A high fixed-cost base and a lot of debt will have the effect of magnifying company
earnings growth. Therefore, in a booming economy, it is nice to be a shareholder of such a company.
In a stagnant economy, revenue tends to be stagnant, meaning there is nothing to magnify. Bond
holder returns are limited by the fixed nature of the repayments, meaning that bond holders do not
participate in the upside from a booming economy.

115
Equities
Responses
A 85%
B 3%
C 12%
D 0%
8. The S&P 500 stood at 1848 at the end of 2013. According to the chart, what would the
approximate return be on the S&P 500 from the trough of March of 2009 to the end of 2013, ignoring
dividends?
A. 170% [correct]
B. 100%
C. 270%
D. 200%
Explanation: At the trough in 2009, the S&P 500 stood at approximately 680. The level at the end of
2013 was 1848. 1,848 – 680 = 1,168. 1,168 / 680 = 172%.

116
Equities
Responses
A 9%
B 73%
C 18%
D 0%
9. The brown line stood at 2639 at the end of 2013. According to the chart, what would the
approximate return be on the S&P 500 including dividends from the trough level in March 2009 of 945
to the end of 2013?
A. 217%
B. 179% [correct]
C. 317%
D. 279%
Explanation: At the trough in 2009, the brown line — which denotes the S&P 500 with dividends
reinvested — stood at 945. The level at the end of 2013 was 2639. 2639 – 945 = 1,694. 1,694 / 945 =
179%.

117
Equities
10. Why are equities volatile?
A. Due to the varying supply of and demand for IPOs

B. Due to the residual nature of earnings [correct]
C. Due to changing tax rates
D. Due to low levels of borrowing
Explanation: Shareholder dividends are paid out from earnings. Fluctuations in both revenue and
costs lead to fluctuations in what is left to pay shareholder dividends, that is, earnings. It is high levels
of borrowing which do, in fact, make equities more volatile.

118
Equities
Responses
A 3%
B 70%
C 12%
D 15%
11. Which of the following statements is true?
A. When you buy an equity, your potential loss is unlimited and your maximum potential gain is
100%.
B. When you buy an equity, the most you can lose is 100% and your potential gain is unlimited.
[correct]
C. When you buy an equity, you are promised a stream of fixed dividends.
D. When you buy a bond, you are promised the residual income of that company.
Explanation: If a company in which you own shares goes bankrupt, your share certificates are
worthless, meaning you lost 100%. If, on the other hand, you own shares in a company which went
on to succeed spectacularly, the earnings — and, therefore, the share price — may multiply.

119
Dividends by their nature are decided periodically and are not promised by company management. A
typical bond promises a series of fixed repayments, as opposed to a portion of the residual income of
that company.

120
Equities
Responses
A 0%
B 9%
C 15%
D 76%
12. In the example highlighting the differences between bond holders and shareholders, surgeon
Jenny is the shareholder. Which row of the budget planning table shows the amount to which she as
a shareholder is entitled?
A. A
B. B
C. C
D. D [correct]
Explanation: Shareholders are entitled to whatever is left after all other stakeholder claims are
satisfied, along with all other fixed costs. In this example, the mortgage is owed to the bank, tax is
owed to the government, and necessities are an unavoidable fixed cost.

121
Equities
Responses
A 9%
B 58%
C 18%
D 15%
13. You buy the stock of four consumer goods companies at the end of 2004 and hold them until
August 2010. Here are the TRA (Total Return) charts from Bloomberg for all four stocks. The "Buy
Price" in the top left-hand corner is the price you paid for each stock. The price of the stock in August
2010 is noted in the chart's legend. The legend also states the Dividend Adjusted Value of the stock
in 2010, the value of the reinvested dividends over the holding period. For which stock did the bulk of
the total return come from dividends?

122
A. Colgate-Palmolive
B. Procter & Gamble [correct]
C. Reckitt Benckiser
D. Church & Dwight
Explanation: You bought Procter & Gamble for 55.08 at the end of 2004. You sold it for 60.19 in
August 2010. The legend tells you that dividends over that period meant that the total you came away
with was 69.17. Your total return, therefore, was 69.17 – 55.08 = 14.09. Dividends contributed 69.17
– 60.19 = 8.98. Therefore, dividends contributed 8.98 / 14.09 = 64% of the total return, far exceeding
the same portion for the other three stocks.

123
Equities
EQUITY RESEARCH
14. What does the release of earnings announcements have in common with the release of economic
indicators?
A. Both are typically released on a quarterly basis.

B. Both are typically published by corporations.
C. Both are estimated in advance by analysts. [correct]
D. Both are of broad interest to all investors.
Explanation: We saw in the Economic Indicators module that analysts predict the direction of
economy. Similarly, stock analysts predict the financial results of companies. Earnings
announcements are typically quarterly while many economic indicators are released more frequently.
Many economic indicators are published by government agencies. As economic indicators provide
insights into the direction of the economy and interest rates, the most important such indicators are of
interest to all investors. Conversely, equity earnings estimates are mostly of interest to existing
shareholders of that company.

124
Equities
EQUITY RESEARCH
15. The number at the bottom right of each supplier's box shows the portion of Boeing's total costs in
the last year which go to that supplier. The number at the bottom right of each customer's box shows
the portion of the customer's capital expenditure (money spent on high value purchases) in the last
year which goes to Boeing. For which company shown was Boeing the primary plane supplier in the
last year?
A. United Continental [correct]

B. United Technologies
C. Honeywell International
D. China Eastern Airlines
Explanation: Boeing is only a supplier to companies on the right-hand side. 61% of United
Continental's capital expenditure went to Boeing, compared to only 16% of China Eastern Airlines's
capital expenditure.

125
Equities
EQUITY RESEARCH
Responses
A 6%
B 9%
C 3%
D 82%
16. Which company is most exposed to the ups and downs of the aircraft engine industry?
A. Rolls-Royce
B. General Electric
C. United Tech Corp
D. MTU Aero Engines [correct]
Explanation: According to the table in the lower right-hand corner of this screen, MTU Aero Engines
gets 100% of its revenue from the aircraft engine industry and thus would be most susceptible to
changes in it.

126
Equities
EQUITY RESEARCH
Responses
A 12%
B 3%
C 0%
D 85%
17. Engines are the most expensive, heavy component on an aircraft and are designed with detailed
specifications. Which of the following would likely be the best theme for a Rolls-Royce analyst
research note to help a portfolio manager decide between investing in Rolls-Royce or United
Technologies?
A. The impact of the price of oil on air travel

B. Regulatory concerns for the Boeing-Airbus duopoly
C. The competitive environment in the super-luxury car segment
D. A comparison of the commercial prospects of new aircraft models [correct]
Explanation: The commercial success of engines is dependent upon the commercial success of the
aircraft models that they serve. Neither Rolls-Royce nor United Technologies operates in the super-
luxury car segment. If there were to be anti-trust concerns about the Boeing-Airbus duopoly, or if the
price of oil were to go up steeply, these factors would probably affect both players roughly equally.

127
Equities
EQUITY RESEARCH
18. You are building a financial model of a bifocal lens manufacturer. Which of the following is the
best driver to use?
A. Median age of society [correct]

B. Mean museum visits per capita per year
C. Mean cruise sales per household per year
D. Total number of bridge and mahjong players
Explanation: The deterioration of vision increases with age. Therefore, the causal intuitive driver of a
bifocal lens manufacturer is the median age of society. The other three metrics correlate with age but
do not drive demand themselves for bifocal lenses.

128
Equities
EQUITY RESEARCH
Responses
A 9%
B 79%
C 12%
D 0%
19. Here is a table from the Bloomberg Intelligence aluminum dashboard which shows the different
end-uses of aluminum in China. Which of the following Bloomberg headlines would be of most
interest to an aluminum trader in China?

129
A. Next-Generation Vehicles to Show Shift From Steel to Aluminum
B. China's Aluminum Demand Weathers Real-Estate Slowdown So Far [correct]
C. Coca-Cola Announces Plans to Recycle, Reuse Cans Sold in U.S.
D. Aluminum Falls on Boeing's Announcement of Production Cuts
Explanation: 33% of China’s aluminum goes towards the construction of buildings. This is the biggest
use case followed by transportation (cars and plans), electric power, machinery, durable consumer
goods, and packaging. Therefore, the story on the use of aluminum in the construction process
should be of most interest.

130
Equities
EQUITY RESEARCH
Responses
A 67%
B 6%
C 9%
D 18%
20. When an analyst is looking at a company for the first time, which of the following four activities
does he do first?
A. Define the industry or industries in which the company operates [correct]

B. Size the market or markets in which the company sells
C. Calculate the company's market share or shares
D. Estimate the breakdown of the company's cost base
Explanation: The industry backdrop is foundational to equity research. Only once the analyst has
accurately defined the industry can he size the market and calculate market shares. Cost is typically
modeled after revenues are modeled.

131
Equities
EQUITY RESEARCH
Responses
A 12%
B 73%
C 12%
D 3%
21. Here is a table from the Bloomberg Intelligence copper dashboard which shows the different end-
users of the “red metal.” Which of the following Bloomberg headlines would likely be of most interest
to a copper trader?
A. Copper Slides 7.7% to Seven-Month Low on U.S. Construction Data

B. China's Construction Slowdown Dents Copper Consumption, Prices [correct]
C. Infrastructure Spending to Lead Asia’s Economic Growth
D. European industrial orders rose in May on Machinery, Tranport

132
Explanation: Building construction and equipment are the two biggest consumers of copper ahead of
infrastructure and industrial uses. Geographically, Asia accounts for 60% of global demand.
Therefore, the story about Chinese construction should be of the most interest.

133
Equities
EQUITY RESEARCH
Responses
A 12%
B 70%
C 9%
D 9%
22. Here is a breakdown of post-it note inventor 3M's revenue by industry. Which of the following
industry drivers should be of most interest to a prospective investor of 3M?
A. The move towards the paperless office

B. The change in postal volumes [correct]
C. The prevalence of surgical procedures
D. The popularity of home improvement projects
Explanation: The biggest revenue contributor to 3M is Containers & Packaging, contributing one-third
of the company's revenue. Postal volumes should therefore be of great interest to 3M investors.

134
Equities
EQUITY RESEARCH
Responses
A 3%
B 3%
C 70%
D 24%
23. Company X was expected to have earnings per share of $0.52 for the upcoming quarter. On the
day of the results, the company reported earnings per share of $0.83. What happened to the share
price when the stock market opened?
A. It went up.
B. It went down.
C. There is not enough information to tell. [correct]
D. It remained unchanged.
Explanation: There is not a consistent relationship between a positive earnings surprise and the
stock going up. When a surprise is positive, the shares go up more often than not, but not always.

135
Equities
ABSOLUTE VALUATION
24. Which company is worth more, Coca-Cola or Pepsi?
A. Coca-Cola because it has a higher market capitalization [correct]

B. Pepsi because it has a higher market capitalization
C. Coca-Cola because it has a higher price per share
D. Pepsi because it has a higher price per share

136
Explanation: Coke shares are worth $43. Coke has 4,400M shares outstanding. Therefore, Coke's
market cap is $43 × 4,400M = $190B. Pepsi shares are worth $98. Pepsi has 1,500M shares
outstanding. Therefore, Pepsi's market cap is $98 × 1,500M = $147B. As Coke has a higher market
cap than Pepsi, Coke is worth more. Coke, therefore, is akin to a larger loaf of bread than Pepsi,
albeit with many more, far thinner slices.

137
Equities
ABSOLUTE VALUATION
25. Widget Co has a market capitalization of $100M. It does a 10-for-1 stock split. It then does a 1-
for-16 reverse stock split. Finally, it does a 35-for-1 stock split. Nothing else changes. What’s the new
market cap?
A. $4.57M
B. $100M [correct]
C. $2,186M
D. $1.8M
Explanation: Stock splits and reverse stock splits have no impact on equity valuation, so the market
cap stays the same.

138
Equities
ABSOLUTE VALUATION
26. What input do both absolute valuation and relative valuation require?
A. Long-term forecasts
B. Short-term forecasts [correct]
C. Historic revenue data
D. Historic earnings data
Explanation: Absolute valuation demands both short- and long-term financial forecasts while relative
valuation only demands short-term forecasts. Relative valuation does not necessarily require any
historic financial data.

139
Equities
ABSOLUTE VALUATION
27. Which of the following is most likely to be the most challenging part of this first step of the
absolute valuation process?
A. Making the assumptions upon which to project future performance [correct]

B. Conducting the necessary mathematics
C. Locating the required historic data within company releases and earnings statements
D. Dividing the market cap by the number of shares
Explanation: Mathematics and data collection are far less challenging than futurology. Deriving
estimated fair share price from the market cap and number of shares is the fifth and final step of the
absolute valuation process.

140
Equities
ABSOLUTE VALUATION
28. What is a reason one discounts future cashflows as part of the absolute valuation process?
A. Future profits are uncertain. [correct]

B. Deflation makes future cashflows worthless.
C. The company might do a share split which will diminish the value of your stake.
D. Investors prefer future payments to payments today.
Explanation: Equity investors expect AT LEAST the U.S. government bond yield, ideally a lot more, to
compensate them for the uncertainty of the future profitability of the company in question. The
number of shares has no bearing on a company's market cap.

141
Equities
ABSOLUTE VALUATION
29. What role does beta play in absolute valuation?
A. It determines how risky a stock is in comparison to the overall stock market. [correct]
B. It sets the 10-year bond yield as a baseline required rate of return.
C. It provides the expected slope of the share price chart into the future.
D. It sets the return on a stock market index as a baseline required rate of return.
Explanation: Beta is a measure of company-specific risk, which is used as an input to the calculation
of the company’s weighted average cost of capital. Beta was introduced into the calculation at step d,
whereas the 10-year bond yield was set as a baseline requirement in step f, and the stock market
return was an input (and not a requirement) in step c.

142
Equities
ABSOLUTE VALUATION
30. What part of the $42.03 share price (to the nearest dollar) is represented by cash?
A. $11 [correct]
B. $9
C. $10
D. $8
Explanation: The shareholders are entitled to the cash on the balance sheet. Microsoft has $90B in
cash and a market cap of $345B. Therefore, $90B / $345B = 26% of the share price is represented
by cash. The share price is $42.03; therefore, 26% × $42.03 = $10.96 represents cash.

143
Equities
ABSOLUTE VALUATION
31. How is enterprise value calculated?
A. Enterprise value = market cap – cash + debt [correct]

B. Enterprise value = market cap + cash – debt
C. Enterprise value = market cap + cash + debt
D. Enterprise value = market cap – cash – debt
Explanation: Enterprise value is total firm value which is divided up between shareholders and bond
holders. Therefore, it consists of a total equity value (market cap) and the net indebtedness of the firm
(total debt – cash).

144
Equities
ABSOLUTE VALUATION
Responses
A 24%
B 15%
C 9%
D 52%
32. Which of the following stocks is most sensitive to the movement of the overall stock market?
A. Home Depot
B. Intel
C. Starbucks
D. Amazon [correct]

145
Explanation: Beta is a measure of sensitivity of a stock to the overall stock market. The beta for a
stock is listed at the top of the table on the right-hand side of the Bloomberg BETA function. Amazon
has the highest beta and is therefore the most sensitive to the market of all the stocks shown.

146
Equities
ABSOLUTE VALUATION
Responses
A 6%
B 18%
C 21%
D 55%
33. Which of the following ascribes the same relative weightings to short-term and long-term
outcomes as the absolute valuation process?
A. A student deciding to attend medical school

B. A yoga instructor avoiding junk food
C. A government giving a tax break on electric car purchases
D. A fishery exceeding fishing quotas [correct]
Explanation: The absolute valuation process ascribes a greater value to the short term than the long
term. Medical school students, health fanatics, and government sponsorship of electric cars all
represent a sacrifice today for a benefit tomorrow. This is the opposite of the absolute valuation

147
weightings. When a fishery cheats on fishing quotas, it imperils the long-term fishing stock while
benefiting the fishery today. This ascribes a similar relative weighting to the short-term and long-term
as the absolute valuation process.

148
Equities
ABSOLUTE VALUATION
Responses
A 9%
B 70%
C 15%
D 6%
34. Here is the WACC function for U.S. drug company Pfizer. The WACC calculation has been
hidden. What is the WACC?
A. 9.4%
B. 8.2% [correct]
C. 84.6%
D. 2.8%

149
Explanation: 84.6% equity mix × 9.4% cost of equity = 7.95% contribution from equity.
15.4% debt mix × 1.6% cost of debt = 0.25% contribution from debt.
WACC = 7.95% + 0.25% = 8.2%.

150
Equities
ABSOLUTE VALUATION
Responses
A 12%
B 15%
C 73%
D 0%
35. A rise in which of the following inputs will increase an absolute valuation?
A. Number of shares
B. Beta
C. Earnings estimates [correct]
D. 10-year government bond yield
Explanation: The higher the earnings estimate, the greater the appraised value within an absolute
valuation. Using a higher beta or a higher 10-year government bond yield will reduce the appraised
value. Number of shares has no effect on appraised equity value, although it will reduce the
appraised equity value per share.

151
Equities
RELATIVE VALUATION
Responses
A 9%
B 6%
C 6%
D 79%
36. How do earnings yields differ from bond yields?
A. The earnings yield from equities is expressed as a percentage while the yields on bonds are
expressed as absolute values.
B. The earnings from equities are paid out in non-cash dividends while the coupons on bonds are
paid out in cash.
C. The earnings yields from equities are always higher than the yields on bonds due to the riskier
nature of equities.
D. The cashflow from equities can continue forever while the cashflow from most bonds comes to
an end. [correct]
Explanation: Companies can in theory live on in perpetuity whereas the vast majority of bonds expire.
Both earnings yields and bond yields are expressed as a percentage. Most equity dividends are paid
in cash. The yield on either a bond or an equity is partially derived from the price of the bond and the
equity. As bonds and equities change hands for whatever price people agree to buy and sell them for,
there is no cast iron law that earnings yields are always higher than bond yields.

152
Equities
RELATIVE VALUATION
Responses
A 6%
B 0%
C 21%
D 73%
37. At its peak at the end of 1999, Microsoft had a market cap of $600B. It was the Apple of its day as
PC sales were booming and most ran Microsoft software. Revenue was growing 30% per year. The
P/E ratio peaked at 70.0x. Looking at this chart, what happened in the subsequent 15 years?
A. Earnings declined and this pushed the market cap down.

B. Earnings grew and this pushed the market cap up.
C. The decline in the P/E ratio canceled out the decline in earnings and this pushed the market
cap up.
D. The decline in the P/E ratio more than offset earnings growth and this pushed the market cap
down. [correct]

153
Explanation: Earnings at Microsoft continued to grow from 1999 to 2014, leaping from $8B to $22B.
P/E, however, came down from over 70.0x to 16.0x. This meant that the market cap came down from
over $600B to just over $300B. The P/E ratio therefore drifted downwards and this more than offset
earnings growth, meaning that the shares went down. Multiple compressions eclipsed the earnings
growth.

154
Equities
RELATIVE VALUATION
38. What is one possible weakness of this peer approach to valuation?
A. It is a very laborious approach to valuation.

B. The estimated growth can be dramatically wrong. [correct]
C. It only focuses on the statistics of one company.
D. It does not account for industry context.
Explanation: Prospective P/E multiples are calculated using future earnings. As such, they can be
dramatically wrong as they were in this case when Chipotle was struck with an E. coli outbreak in
2015. Relative valuation is quick and easy. It compares peers in the same industry.

155
Equities
RELATIVE VALUATION
Responses
A 6%
B 12%
C 0%
D 82%
39. Let’s compare McDonald’s to the market. Here we can see that the S&P 500’s P/E ratio is 18.5x.
McDonald’s has a price to earnings ratio of 19.3x, meaning that it trades roughly “in line” with the U.S.
market. Investors will look at how the P/E of the company has trended in comparison to the P/E of the
market. Any material deviation may pique investors’ interest. Here we can see that since the late
1980s, the P/E of McDonald’s has moved loosely in line with the P/E of the market.

156
What may be a problem of comparing the P/E of a stock to the P/E of the overall market?
A. The overall market may not be sufficiently broad for the purpose of comparison.
B. Given the number of stocks in the overall market, it is very time consuming to calculate the P/E
of the market.
C. The overall stock market index performance excludes the effect of dividends.
D. A stock’s P/E ratio can remain above or below market average for extended periods. [correct]
Explanation: The P/E ratio of a stock does not automatically revert to the mean P/E ratio of the stock
market. The P/E of the overall market is a broad measure by definition. The overall P/E of the stock
market is widely calculated and available for investors. Both indices and single share prices typically
do not account for the reinvestment of dividends.

157
Equities
RELATIVE VALUATION
Responses
A 18%
B 6%
C 9%
D 67%
40. Here is a chart of the Nasdaq Composite, the world’s main technology index. It peaked in the
dotcom bubble on March 10, 2000. The P/E ratio later peaked above 500. In hindsight, this is widely
agreed to have been a bubble. In March 2015, the index value for the first time since then surpassed
the peak. Why might some investors at that point have argued “this time it’s different”?

158
A. Given low bond yields in the wake of the financial crisis, a 0.2% earnings yield on the Nasdaq
now looks far more reasonable.
B. Given low bond yields in the wake of the financial crisis, a 0.6% earnings yield on the Nasdaq
now looks far more reasonable.
C. Earnings grew substantially, meaning that the P/E ratio in early 2015 was only around 164.6x.
D. Earnings grew substantially, meaning that the P/E ratio in early 2015 was only around 30.3x.
[correct]
Explanation: See the blue earnings line on the chart. In 1999, it was close to the x-axis, and in 2015,
it had multiplied in value. This was driven by many factors. For example, Google was one year old in
1999 and it listed in 2004. As of early 2015, it was the second largest stock in the Nasdaq and was
profitable. In 1999, Apple was early in its turnaround. As of early 2015, it was the biggest stock in the
Nasdaq and the biggest stock on earth and had a mid-teen P/E ratio. Blue went up, therefore green
went down. The P/E ratio of the Nasdaq on the chart shown is 30.3x.

159
Equities
RELATIVE VALUATION
Responses
A 9%
B 6%
C 6%
D 79%
41. The World Equity Index function show contains two valuation metrics for the S&P 500. The Nike
description page contains the same two valuation metrics. How does Nike's valuation compare to that
of the S&P 500?
A. Nike is less expensive than the S&P 500 on a P/E basis and more expensive on a dividend
yield basis.
B. Nike is more expensive than the S&P 500 on a P/E basis and less expensive on a dividend
yield basis.
C. Nike is less expensive than the S&P 500 on both a P/E and dividend yield basis.
D. Nike is more expensive than the S&P 500 on both a P/E and dividend yield basis. [correct]

160
Explanation: The higher the P/E ratio, the more expensive the stock. The lower the dividend yield, the
more expensive the stock. This is because a dividend yield is the annual dividend divided by the
share price, so if the share price is high in relation to the dividend, the dividend yield is low. Nike's P/E
ratio is 27.6x and its dividend yield is 1.08%. Meanwhile, the S&P 500's P/E ratio is 19.2x and its
dividend yield is 2.16%.

161
Equities
RELATIVE VALUATION
Responses
A 67%
B 18%
C 3%
D 12%
42. If the earnings per share of a company is $1 and the earnings yield is 2%, what is the price per
share?
A. $50.00 [correct]
B. $20.00
C. $200.00
D. $5.00
Explanation: Share price = earnings per share / earnings yield. This is because earnings yield =
earnings per share / share price, so the two earnings per share expressions cancel each other out,
leaving you with the share price. $1.00 / 0.02 = $50.00.

162
Equities
RELATIVE VALUATION
Responses
A 18%
B 12%
C 15%
D 55%
43. This chart shows a scatterplot with the x-axis being the estimated sales growth and the y-axis
being the estimated P/E multiple. Given this data alone, which of the following companies may
warrant further analysis by a portfolio manager looking to buy an insurance company for her portfolio?

163
A. Markel
B. Allstate
C. Erie Indemnity
D. Chubb [correct]
Explanation: Portfolio managers are typically hunting for a bargain. While high sales growth is
attractive, it will be weighed against the reasonableness of the multiple being paid for the shares.
Buying a rapidly growing company for a low multiple is the goal for many portfolio managers. In this
case, the most rapidly growing company, Chubb, has one of the lowest multiples of its peer group. It
is growing more rapidly and on a lower multiple than the other three options.

164

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OVERALL STATS

Group Name University of Financial Success

Report Date 22-Dec-15

© 2015 Bloomberg Finance L.P.

© 2015 Bloomberg Finance L.P.

1. How accurately do GDP statistics portray the economy and why?

A. Accurately because they are official numbers reported by the government

© 2015 Bloomberg Finance L.P.

2. Consider the formula GDP = C + I + G + (X – M). A country is undergoing a boom in consumption

© 2015 Bloomberg Finance L.P.

(Students can scroll through both charts.)

© 2015 Bloomberg Finance L.P.

© 2015 Bloomberg Finance L.P.

© 2015 Bloomberg Finance L.P.

© 2015 Bloomberg Finance L.P.

A. Green line [correct]

© 2015 Bloomberg Finance L.P.

© 2015 Bloomberg Finance L.P.

8. What type of indicators are unemployment and business confidence?

A. Unemployment is leading and business confidence is coincident.

© 2015 Bloomberg Finance L.P.

9. Which of the following qualities of economic indicators do investors prize most?

© 2015 Bloomberg Finance L.P.

A. Because governments consistently alter their GDP measurement methods

© 2015 Bloomberg Finance L.P.

© 2015 Bloomberg Finance L.P.

12. Which economic indicator is most directly linked to unemployment?

A. Nonfarm payrolls [correct]

© 2015 Bloomberg Finance L.P.

(Students can scroll through this calendar.)

© 2015 Bloomberg Finance L.P.

© 2015 Bloomberg Finance L.P.

© 2015 Bloomberg Finance L.P.

15. How have economic forecasts for this country evolved?

© 2015 Bloomberg Finance L.P.

© 2015 Bloomberg Finance L.P.

© 2015 Bloomberg Finance L.P.

A. To determine in which countries the banks should operate

© 2015 Bloomberg Finance L.P.

18. Which of the following is the biggest pitfall of economic indicators?

A. They do not take into account seasonality.

© 2015 Bloomberg Finance L.P.

© 2015 Bloomberg Finance L.P.

© 2015 Bloomberg Finance L.P.

© 2015 Bloomberg Finance L.P.

© 2015 Bloomberg Finance L.P.

© 2015 Bloomberg Finance L.P.

© 2015 Bloomberg Finance L.P.

© 2015 Bloomberg Finance L.P.

© 2015 Bloomberg Finance L.P.

© 2015 Bloomberg Finance L.P.

6. Which of the following is NOT an example of a failed peg?

A. British sterling in 1992

© 2015 Bloomberg Finance L.P.

© 2015 Bloomberg Finance L.P.

© 2015 Bloomberg Finance L.P.

© 2015 Bloomberg Finance L.P.

A. The currency strengthens. [correct]

© 2015 Bloomberg Finance L.P.

A. A surprise change in inflation expectations [correct]

© 2015 Bloomberg Finance L.P.

11. What does the Big Mac index show?

A. How the law of one price is true of consumer products