Sunday, May 19, 2024
Banking QuizEnglish

English: Reading Comprehension Set 4

This set contains Reading Comprehension Exercise Practice Passage for upcoming exams like SBI PO, IBPS PO, Clerk and insurance exams. Reading Comprehension Passage SBI IBPS

Read the following passage and answer the questions that follows.

TEN years ago this month investors were pretty confident. True, there were signs that problems in the American housing market would mean trouble for mortgage lenders. But most people agreed with Ben Bernanke, the Federal Reserve chairman, that “the impact on the broader economy…seems likely to be contained.” The IMF had just reported that “overall risks to the outlook seem less threatening than six months ago.”

That was reflected in market valuations. In May 2007 the cyclically-adjusted price-earnings ratio (CAPE), a measure that averages profits over ten years, was 27.6 for American equities . That ratio turned out to be the peak for the cycle. As the problems at Bear Stearns, Lehman Brothers and others emerged, and as the world was gripped by recession, share prices plunged. By March 2009 the CAPE had fallen by more than half.

Central banks then kicked into action, slashing interest rates and buying assets via quantitative easing (QE). The stockmarkets recovered rapidly and the S&P 500 is now more than 50% higher than it was ten years ago. And the American stockmarket’s CAPE, at 29.2, is also higher than it was back then.

Investors might worry about equity valuations but what are their alternatives? A decade ago, the ten-year Treasury-bond yield was around 4.8%; now it is 2.3%. The Fed may have started to raise rates but the return on cash is still pitiful in nominal terms and negative in real (ie, after inflation) terms.

But at least the return on cash and bonds (held to maturity) is fixed in nominal terms. Investors have already suffered two big bear markets in equities this millennium. On each occasion, their losses in percentage terms were in the double digits. What might trigger another collapse?

There is no law that says the CAPE has to return to its long-run average of 16.7; indeed, the ratio’s mean over the past 30 years has been 24.5. Even in the depths of the 2008-09 crisis, the ratio only fell below the long-run average for ten months.

When investors accept a high CAPE for shares, they are confident about the ability of companies to maintain, and increase, their profits. One reason why the American market has powered ahead since the election of Donald Trump is that investors expect cuts to the tax rate on corporate profits, allowing more of those profits to be passed on to shareholders.

As Jeremy Grantham of GMO, a fund-management group, points out, there does seem to have been a step change in the level of American profits, as a proportion of both sales and GDP, since 1996. The corollary has been a lower share of GDP for labour, one factor behind voter discontent.

Mr Grantham suggests two forces behind the higher profits: enhanced monopoly power for American companies; and low real interest rates, which have allowed firms to operate with more debt. Both suggest there is something wrong about the way capitalism is currently working. If profit margins are high, then more capital ought to be ploughed into businesses until investment-led competition drives margins back down; that has not happened. And low real interest rates reflect, in part, the extraordinary measures taken by central banks to revive developed economies after the financial crisis.

The conventional threats to the equity market are twofold: a sharp rise in interest rates, which would hit indebted individuals and companies; or a decline into recession, which would dent profits. Neither looks imminent at the moment, which helps explain why Wall Street keeps hitting record highs.

But there are other ways that profit margins could be hit. Protectionist policies could disrupt the free flow of goods, services and people across borders. A credit crisis could emerge elsewhere in the world—in China, for example, where debt has been growing rapidly. Flashpoints in the Middle East or on the Korean peninsula could spark war.

Investors are not as complacent as they seemed a decade ago. In a poll conducted by Bank of America Merrill Lynch, a net 32% of global fund managers think shares are overvalued. Despite that, however, a net 40% have higher-than-normal holdings in shares.

In other words, investors are managing to be simultaneously bullish and skittish. By a large majority, fund managers expect global growth and corporate profits to be strong over the next 12 months; but they also know such expectations are already fully reflected in share prices. All will be well provided there are no shocks. But history suggests shocks have a nasty habit of occurring.

  1. Which of the following is/are not the way(s) suggested in the passage using which profit margins could be hit?
    (i) Steep rise in policy rate
    (ii) Recession
    (iii) Protectionist Policies
    A) Only (i)
    B) Only (ii)
    C) Both (i) and (ii)
    D) Both (ii) and (iii)
    E) All are suggested
    View Answer
    Option A
    : Both (ii) and (iii) are suggested where (i) is not mentioned. It is said that sharp rise in interest rate can hit profit margin, but interest rate and policy rate are different things.
  2. Which of the following statement correctly depicts the meaning of “Despite that,” as used in the passage (highlighted)?
    A) Even though there are better stocks in the market still 40% people have higher than normal holdings in the stock.
    B) Even though 32% of global fund managers have negative outlook, still 40% people have higher than normal holdings in the stock.
    C) Even though price of stocks may fall in future still 40% people have higher than normal holdings in the stock.
    D) Even after having 40% higher holdings of share, people believe that stocks are overvalued.
    E) Due to low value of price, people have bought these shares
    View Answer
    Option C
    : Overvalued shares are those whose price is more than its earnings outlook and hence the price may fall anytime. So even when the shares are overvalued and its price may fall anytime still 40% have higher-than-normal holdings in shares.
  3. Why 10 years ago, were the investors confident even after troubled American Housing as mentioned in the passage?
    A) As CAPE value increased.
    B) They had a view that the impact of troubles on big economy would be contained
    C) Due to easy recovery of stock market
    D) Due to high yield on treasury bonds
    E) All of these
    View Answer
    Option B
    : As mentioned in the first passage, most people agreed with Ben Bernanke, the Federal Reserve chairman……
  4. What steps did Central Bank of America take after CAPE had fallen in 2009?
    (i) Interest Rate cut
    (ii) Increased the money supply in the economy
    (iii) Buying and selling of assets.
    A) Only (i)
    B) Only (i) and (iii)
    C) Only (i) and (ii)
    D) Only (iii)
    E) All of these
    View Answer
    Option C
    : The two steps are: slashing interest rate and buying assets via QE. First point is directly mentioned. Buying assets via QE means the Bank buys assets like government security in the market and in return increase the money supply as it has bought the asset so it will pay some money to the economy. So (ii) is correct. (iii) is wrong because it says about selling of assets. If the central bank sells the assets it means it will suck money from the economy that will worsen the condition even further.
  5. Why do investors buy shares with high CAPE even after knowing that they may falldrastically in future?
    A) Due to the IMF report that predicted high CAPE in future.
    B) Quantitative easing (QE) measures by Central Bank.
    C) Due to recent cut in tax, resulting in visible profit growth
    D) They have full confidence in the ability of the company to make profits.
    E) All of these
    View Answer
    Option D
    : Mentioned in 7th paragraph
  6. What is/are the reasons for American firms to operate in profit even after debts?
    (i) Protectionist Policy
    (ii) Enhanced Monopoly Power
    (iii) Low nominal Interest Rate
    A) Both (ii) and (iii)
    B) Only (iii)
    C) Only (i)
    D) Only (ii)
    E) All
    View Answer
    Option D
    : The two points mentioned for this in the passage are: enhanced monopoly power and low real interest rates. Now real and nominal interest rates are two different things. So only (ii) is correct.
  7. Which of the following will be the most suitable title for the passage?
    A) Upcoming recession a challenge for global economy
    B) Increasing dominance of America
    C) Investors are both bullish and skittish about share prices
    D) The impact of recession on broad economy
    E) After effects of recession
    View Answer
    Option C
    : When we read the passage carefully , we get an idea that the passage is centred around investors. A) cannot be the title as it talks about global economy and the passage is restricted to America. B) is also not suitable as nothing such is mentioned. D) The passage doesnot talks about the impact of recession. Recession is just a small part of the passage. Hence D) and E) are also not suitable. Now C) which is about recession and also reflects the view of author as mentioned in the last paragraph is the most suitable title.
  8. Which of the following word means opposite to PLUNGED as mentioned in the passage?
    A) bothered
    B) opulent
    C) intensification
    D) shrink
    E) insinuate
    View Answer
    Option C
    : plunged here means falled/decreased. Intensify means to increase
  9. Which of the following word means opposite to IMMINENT as mentioned in the passage?
    A) convenient
    B) prospective
    C) preordained
    D) portending
    E) distant
    View Answer
    Option E
    : imminent- about to happen
  10. Which of the following word means same as COMPLACENT as mentioned in the passage?
    A) collected
    B) unsure
    C) soothed
    D) gratified
    E) meander
    View Answer
    Option D
    : complacent- satisfaction;



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