chapter 13

Question 1

What are the 3 market theories?

Answer 1

1. Efficient Market Hypothesis - Market reflects news and true value of stocks as news comes out.
2. Random walk theory - Previous price history bears no indication of where future stock prices will go.
3. Rational expectations theory - People will use information, past experience to make decisions on the market.

Question 2

What factors dictate fundamental macroeconomic analysis?

Answer 2

1. fiscal policy
2. monetary policy
3. flow of funds
4. inflation

Question 3

what is fundamental industry analysis?

Answer 3

industry structure has more to do with profitability than the product. company strategy compared to their competition and pricing.

Question 4

how to estimate growth of a industry?

Answer 4

1. how does sales in industry compare to change in GDP
2. how does rate of change in real GDP compare with industry’s rate of change in unit volumes
3. how does the industry’s price index compare with the overall rate of inflation

Question 5

what is economies of scale?

Answer 5

Scaling up production lowers costs

Question 6

what is a emerging growth industry?

Answer 6

A new product or innovation coming to market new industry emerging

Question 7

what is a growth industry?

Answer 7

A industry which sales and earnings are outpacing most other industries.

generally have high price to earnings ratios and no dividends. if future expectations lower can have sharp price declines.

Question 8

how to classify industries by competitive force?

Answer 8

1. ease of entry for new competitors, opportunities economies of scale, existence of distribution channels, product differences
2. degree of competition, number of competitors and their strength, degree of product difference
3. new substitute products
4. possible lower prices
5. cost of raw materials

Question 9

what are the two main ways stocks can be classified within the stock market?

Answer 9

1. defensive

2. cyclical

Question 10

what are the 3 types of industry cycles?

Answer 10

1. Commodity basic cyclical - forest, metals, chemicals
2. Industrial cyclical - transportation, capital goods, basic industries ( steel, building materials)
3. consumer cyclical - merchandising companies and automobiles

Question 11

what is return of equity (ROE)?

Answer 11

company income divided by shareholder equity. considered return on net assets.