Institutional Advisors for All Inc., or IAAI, is a consulting firm that primarily advises all types of institutions such as foundations, endowments, pension plans, and insurance companies. IAAI also provides advice to a select group of individual investors with large portfolios. One of the claims the firm makes in its advertising is that IAAI devotes considerable resources to forecasting and determining long-term trends; then it uses commonly accepted investment models to determine how these trends should affect the performance of various investments. The members of the research department of IAAI recently reached some conclusions concerning some important macroeconomic trends. For instance, they have seen an upward trend in job creation and consumer confidence and predict that this should continue for the next few years. Other domestic leading indicators that the research department at IAAI wishes to consider are industrial production, average weekly hours in manufacturing, the S&P 500 stock index, the money supply, and the index of consumer expectations.In light of the predictions for job creation and consumer confidence, the investment advisers at IAAI want to make recommendations for their clients. They use established theories that relate job creation and consumer confidence to inflation and interest rates and then incorporate the forecast movements in inflation and interest rates into established models for explaining asset prices. Their primary concern is to forecast how the trends in job creation and consumer confidence should affect bond prices and how those trends should affect stock prices.IAAI uses primarily historical data in its calculations and forecasts. Which of the following regarding the actions of IAAI is most accurate?a. Credit risk premiums may be useful to IAAI because they are based on actual market expectations.b. IAAI should use a moving average of recent stock returns when times are bad because it will result in a high expected equity risk premium.c. Long time spans should be used so that regime changes can be factored into the forecasts.
Institutional Advisors for All Inc.,
or IAAI, is a consulting firm that primarily advises all types of institutions such as foundations,
endowments, pension plans, and insurance companies. IAAI also provides advice to a select group of
individual investors with large portfolios. One of the claims the firm makes in its advertising is that IAAI devotes considerable resources to
years. Other domestic leading indicators that the research department at IAAI wishes to consider are industrial production, average weekly hours in manufacturing, the S&P 500 stock index, the money
supply, and the index of consumer expectations.
In light of the predictions for job creation and consumer confidence, the investment advisers at IAAI want to make recommendations for their clients. They use established theories that relate job creation and consumer confidence to inflation and interest rates and then incorporate the forecast movements in inflation and interest rates into established models for explaining asset prices. Their
primary concern is to forecast how the trends in job creation and consumer confidence should affect bond prices and how those trends should affect stock prices.
IAAI uses primarily historical data in its calculations and forecasts. Which of the following regarding the actions of IAAI is most accurate?
a. Credit risk premiums may be useful to IAAI because they are based on actual market expectations.
b. IAAI should use a moving average of recent stock returns when times are bad because it will result in a high expected equity risk premium.
c. Long time spans should be used so that regime changes can be factored into the forecasts.
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