Using a time series, an economist with Churn Brothers Brokerage examines the relationship between the historical earnings multiple of the banking industry with that of the S&P 500 index. The results of this time series are used to project an estimate of the future earnings multiple for the banking industry. Which of the following best characterizes this method of forecasting an industry earnings multiple? Choose the best answer.
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A. B. C. D. E. F.B
The method profiled in this example is "macroanalysis," which is one of two methods for estimating the earnings multiplier of an industry. Macroanalysis involves examining the historical relationship between the earnings multiplier of an industry with that of the overall market. Macroanalysis forecasts often use a time series.
The macroanalysis method is contrasted by microanalysis, which involves examining the variables underlying the earnings multiplier - the required rate of return, the growth forecast, and the dividend payout ratio. In microanalysis, these variables are examined for the industry and then compare them with the values of these variables for the entire market.
The "Porter Method" is used to examine the level of competition in an industry, and "Monte Carlo simulation" is a method of measuring stand-alone risk. While
"time series regression" is an appealing choice, it does not represent the best possible answer.