CFM Financial Markets & Economic Indicators 4 — Questions and Answers
Question 1: Which leading economic indicator measures the number of new building permits issued for private housing units?
- Housing starts
- Building permits (Correct answer)
- Existing home sales
- Case-Shiller Home Price Index
Correct answer: Building permits
Building permits are a leading indicator because they precede actual construction activity, signaling future economic output and employment in the construction sector.
Question 2: What is the relationship between a bond's duration and its price sensitivity to interest rate changes?
- Higher duration means lower price sensitivity
- Higher duration means higher price sensitivity (Correct answer)
- Duration has no relationship to price sensitivity
- Duration only affects sensitivity for short-term bonds
Correct answer: Higher duration means higher price sensitivity
Duration measures a bond's price sensitivity to interest rate changes; a higher duration indicates greater price volatility for a given change in interest rates.
Question 3: Which market condition describes a situation where asset prices rise 20% or more from a recent low?
- Bear market
- Bull market (Correct answer)
- Correction
- Consolidation
Correct answer: Bull market
A bull market is conventionally defined as a sustained rise of 20% or more in asset prices from a recent trough, reflecting investor optimism and economic expansion.
Question 4: Which economic concept describes the additional output generated by employing one more unit of a factor of production?
- Average product
- Total product
- Marginal product (Correct answer)
- Fixed factor productivity
Correct answer: Marginal product
Marginal product measures the change in total output resulting from a one-unit increase in a variable input while holding all other inputs constant.
Question 5: In the US Treasury market, which security has the longest maturity at issuance?
- Treasury Bills (T-Bills)
- Treasury Notes (T-Notes)
- Treasury Bonds (T-Bonds) (Correct answer)
- Treasury Inflation-Protected Securities (TIPS)
Correct answer: Treasury Bonds (T-Bonds)
Treasury Bonds are issued with maturities of 20 or 30 years, making them the longest-maturity conventional US government securities.
Question 6: What does the VIX index primarily measure?
- Historical volatility of S&P 500 over the past 30 days
- Expected volatility of S&P 500 over the next 30 days (Correct answer)
- Average daily trading volume of S&P 500 stocks
- Correlation between equity and bond markets
Correct answer: Expected volatility of S&P 500 over the next 30 days
The VIX (CBOE Volatility Index) derives expected 30-day volatility from S&P 500 options prices, earning its nickname as the 'fear gauge' of financial markets.
Question 7: Which type of economic indicator typically changes direction before the overall economy turns?
- Lagging indicators
- Coincident indicators
- Leading indicators (Correct answer)
- Diffusion indicators
Correct answer: Leading indicators
Leading indicators, such as building permits and stock market returns, tend to change direction before the overall economy, making them useful for forecasting future economic activity.
CFM Financial Markets & Economic Indicators 4
Which leading economic indicator measures the number of new building permits issued for private housing units?