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Growth of GDP (Gross domestic product) of economy is in line with the revenue growth of...

Growth of GDP (Gross domestic product) of economy is in line with the revenue growth of companies. Nonetheless there are practical issues in using this measure, GDP growth, to predict stock prices. Explain.

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Expert Solution

Growth of gross domestic product of a country is mostly in line with the revenues of various company but it is not completely reflecting the growth of company because there are macro and micro factors which are driving the growth of Companies and every company have a former specific factor which is driving their own growth where as Gross Domestic Product is reflection of the growth of the overall economy and it is not a representation of the growth of single industry or a single company so it can be said that Gross Domestic Product is a wide reflection of the performance of various stocks in the economy but it is not representative of a single sector.

there are a large number of practical issues in prediction of stock prices using Gross Domestic Product because-

A. firm will be having a large number of systematic risk associated with their performance and the systematic risk cannot be diversifed the away.

B. Performance of a company will also be driven by the company related factors and industry related factors and they may not be falling in line with the movement of the Gross Domestic Product because it can be seen that it at the time of the coronavirus crisis even though the GDP is going down various companies are hitting 52 week high.

C. Performance of a company is also related upon the performance of the management and they can be induced in various kind of window dressing and fraud also so it can be said that it it is not completely reflective of gross domestic product growth.

D. Various companies are highly defensive and their movement of contrary to the movement of the economy so these company will be rising when the whole economy would be falling.

E. Various company will be having a lot of foreign exchange rate risk and when the domestic country Gross Domestic Product is falling along with the currency is falling then if the company is having the exposure in another market then it would be a gainer because it is having a exposure in those markets which are having appreciation in their respective currencies.

F. The performance of companies are also affected by performance of subsidiaries in other countries so it is not completely reflective of the movement of the gross domestic product


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