Financial and Economic Analysis
Financial and Economic Analysis (BMBA 9113)
Problem Set II (130 points)
Directions: Answer the following problems IN DETAIL. Your analysis must be typed and should be free of grammatical errors and “slang” terms.” Wherever appropriate, make sure you supplement your discussion with graphical analysis and equations. The graphs may be hand drawn, but please make sure they are neat. There are no restrictions or requirements on working in groups. The one exception is that each person must hand in his/her OWN work. In economic terms, there are no input restrictions; however, the output MUST be yours.
1. (15 points) The accommodative policies of the Federal Reserve System, the European Central Bank, and the Bank of Japan involve the purchase of fixed-income securities to infuse liquidity into their respective economies for the purpose of stimulating economic activity. Using the “money line-spending line” diagram and aggregate demand and supply curves, depict a situation in which monetary accommodation will not produce the intended outcome. Apart from the graphical analysis, what is a reason to doubt that the policies will work as intended?
2. (5 points) Returning to the first problem set, which of the five companies are most likely to be impacted by the increase in global liquidity? Why? Do their betas tell you anything?
3. (10 points) A popular financial newsletter called the Zweig Forecast states the following: "In a nutshell, easier money and lower interest rates are bullish; tighter money and higher interest rates are bearish" (Martin E. Zweig 's italics, not mine). Is this really true? Let us test this assertion with the following model on stock prices:
SPt = b0 + b1iTt + b2Mt + et
where SPt = annual stock price index -- the S&P 500; iTt = annual yield on long-term Treasury bonds; Mt = annual M2 in real (1982-84=100) dollars; and et = error term.
The results were generated from 40 years of data through
Problem Set II (130 points)
Directions: Answer the following problems IN DETAIL. Your analysis must be typed and should be free of grammatical errors and “slang” terms.” Wherever appropriate, make sure you supplement your discussion with graphical analysis and equations. The graphs may be hand drawn, but please make sure they are neat. There are no restrictions or requirements on working in groups. The one exception is that each person must hand in his/her OWN work. In economic terms, there are no input restrictions; however, the output MUST be yours.
1. (15 points) The accommodative policies of the Federal Reserve System, the European Central Bank, and the Bank of Japan involve the purchase of fixed-income securities to infuse liquidity into their respective economies for the purpose of stimulating economic activity. Using the “money line-spending line” diagram and aggregate demand and supply curves, depict a situation in which monetary accommodation will not produce the intended outcome. Apart from the graphical analysis, what is a reason to doubt that the policies will work as intended?
2. (5 points) Returning to the first problem set, which of the five companies are most likely to be impacted by the increase in global liquidity? Why? Do their betas tell you anything?
3. (10 points) A popular financial newsletter called the Zweig Forecast states the following: "In a nutshell, easier money and lower interest rates are bullish; tighter money and higher interest rates are bearish" (Martin E. Zweig 's italics, not mine). Is this really true? Let us test this assertion with the following model on stock prices:
SPt = b0 + b1iTt + b2Mt + et
where SPt = annual stock price index -- the S&P 500; iTt = annual yield on long-term Treasury bonds; Mt = annual M2 in real (1982-84=100) dollars; and et = error term.
The results were generated from 40 years of data through