Question 1

If the put/call ratio increases, market contrarians may interpret this as what kind of signal?
A) buy signal
B) sell signal
C) hold signal
D) this is not interpreted as a signal

Accepted Answer

An increase in the put/call ratio is often interpreted by market contrarians as a buy signal. This is because a higher ratio suggests that investors are buying more puts than calls, indicating bearish sentiment. Contrarians believe that when sentiment is overly bearish, it might be a good time to buy, as the market could be nearing a bottom.

Question 2

A possible limit on arbitrage activity that may allow behavioral biases to persist is ________.
A) technical trends in prices
B) momentum effects
C) fundamental risk
D) trend reversals

Accepted Answer

Fundamental risk can limit arbitrage activity because arbitrageurs face the risk that their trades might not converge to the expected value due to changes in the underlying fundamentals of the asset. This risk can deter arbitrage, allowing prices that deviate from fundamental values due to behavioral biases to persist longer than they otherwise would.

Question 3

A ________ is a value above which it is difficult for the market to rise.
A) book value
B) resistance level
C) support level
D) confidence level

Accepted Answer

A resistance level is a price point beyond which traders and investors have difficulty pushing the price of an asset. This can occur because there are selling pressures that are strong at that level or because investors believe the asset is overvalued at that price. As a result, the resistance level acts as a barrier preventing further price increases, at least temporarily.

Question 4

At the end of July, the average yields on 10 top-rated corporate bonds and 10 intermediate-grade bonds were 7.65% and 8.42%, respectively. At the end of August, the average yields on 10 top-rated corporate bonds and 10 intermediate-grade bonds were 6% and 6.71%, respectively. The confidence index ________ during August, and bond technical analysts are likely to be ________.
A) increased; bullish
B) increased; bearish
C) decreased; bullish
D) decreased; bearish

Accepted Answer

CI (July) = 11eaaae8_8b5f_1460_a4b8_db3906a132b5_TB6474_11 = 0.91
CI (August) = 11eaaae8_8b5f_1461_a4b8_7ba045913644_TB6474_11 = 0.89
Since the confidence index decreased, this would be considered a bearish signal.

Question 5

It is difficult to test the Kondratieff wave theory because ________.
A) it applies to only Russian stocks
B) its main proponent found contrary research results
C) only two independent data points are generated each century
D) the stock market is too volatile to generate smooth waves

Accepted Answer

The Kondratieff wave theory is based on long-term cycles that occur every 50-60 years, which means that only two independent data points are generated each century. This makes it difficult to test the theory empirically. The other options are incorrect as the theory is not limited to Russian stocks, its main proponent did not find contrary research results, and stock market volatility does not necessarily invalidate the theory.

Question 6

An important assumption underlying the use of technical analysis techniques is that ________.
A) security prices adjust rapidly to new information
B) security prices adjust gradually to new information
C) security dealers will provide enough liquidity to keep price changes relatively small
D) all investors have immediate and costless access to information

Accepted Answer

Technical analysis is based on the assumption that security prices adjust gradually to new information, allowing patterns and trends to form that can be used to predict future price movements.

Question 7

On a particular day, there were 890 stocks that advanced on the NYSE and 723 that declined. The volume in advancing issues was 80,846,000, and the volume in declining issues was 70,397,000. The common measure of market breadth is ________.
A) -10,449,000
B) -167
C) 167
D) 10,449,000

Accepted Answer

Market breadth = 890 - 723 = 167

Question 8

A point and figure chart:
I. Gives a sell signal when the stock price penetrates previous lows
II. Tracks significant upward or downward movements
III. Has no time dimension
IV. Indicates congestion areas
A) I and II only
B) II and III only
C) I, III, and IV only
D) I, II, III, and IV

Accepted Answer

Point and figure charts are designed to filter out smaller price movements, focusing on significant upward or downward trends (II), and they do not incorporate a time dimension, as they are concerned only with price movements (III). They give sell signals when the price penetrates previous lows (I) and can indicate congestion areas where the price moves within a tight range (IV).

Question 9

On a particular day, there were 920 stocks that advanced on the NYSE and 723 that declined. The volume in advancing issues was 80,846,000, and the volume in declining issues was 70,397,000. The trin ratio is ________, and technical analysts are likely to be ________.
A) .90; bullish
B) .90; bearish
C) 1.11; bullish
D) 1.11; bearish

Accepted Answer

Trin = 11eaaae8_8b5f_3b72_a4b8_892968d1c8a6_TB6474_11 = 1.11

Question 10

The tendency of investors to hold on to losing investments is called the ________.
A) overweighting effect
B) head-in-the-sand effect
C) disposition effect
D) prospector effect

Accepted Answer

The tendency of investors to hold on to losing investments is called the disposition effect, where they hold on to losses for longer periods of time instead of selling and accepting the loss. The overweighting effect refers to the tendency of investors to place too much weight on certain information, while the head-in-the-sand effect refers to investors ignoring negative information about their investments. The prospector effect refers to investors taking on more risk in their investments when they have experienced success in the past.

Question 11

According to market technicians, a TRIN statistic of less than 1 is considered a ________.
A) bearish signal
B) bullish signal
C) volume decline
D) signal reversal

Accepted Answer

A TRIN statistic of less than 1 is considered a bullish signal. The TRIN, or Arms Index, is a market indicator that combines both the advancing/declining issues and advancing/declining volume to measure overall market sentiment. A TRIN below 1 suggests that trading volume is higher in advancing stocks than in declining stocks, indicating bullish sentiment. A TRIN above 1 suggests the opposite, indicating bearish sentiment.

Question 12

On day 1, the stock price of Ford was $12 and the automotive stock index was 127. On day 2, the stock price of Ford was $15 and the automotive stock index was 139. Consider the ratio of Ford to the automotive stock index at day 1 and day 2. Ford is ________ the automotive industry, and technical analysts who follow relative strength would advise ________ the stock.
A) outperforming; buying
B) outperforming; selling
C) underperforming; buying
D) underperforming; selling

Accepted Answer

Day 1 Ratio = 11eaaae8_8b5e_ed4e_a4b8_e945a4e97d50_TB6474_11 = 0.09449
Day 2 Ratio = 11eaaae8_8b5f_145f_a4b8_f138f009c834_TB6474_11 = 0.107914
Since the ratio is increasing, the relative strength of Ford is improving; it is outperforming and should be bought.

Question 13

In technical analysis, ________ is a value below which the market is relatively unlikely to fall.
A) book value
B) resistance level
C) support level
D) the Dow line

Accepted Answer

A support level is a price level where the market has found support and is expected to bounce back up from. This is often seen as a floor for a stock's price, as it's the level where buying pressure overcomes selling pressure. Traders and investors use support levels to determine entry and exit points for positions, and can use them as a stop loss level if the market breaks down below the support level. Therefore, a support level is the value below which the market is relatively unlikely to fall.

Question 14

If you are not a contrarian, you consider a high put/call ratio to be a ________.
A) bearish signal
B) trend confirmation signal
C) signal to enter the options market

Accepted Answer

A high put/call ratio indicates that more investors are buying puts (betting on a market decline) compared to calls (betting on a market rise). This is usually seen as a bearish signal by non-contrarian investors who follow the crowd sentiment.

Question 15

________ is a tool that can help identify the direction of a stock's price.
A) Prospect theory
B) Framing
C) A moving average
D) Conservatism

Accepted Answer

A moving average is a technical analysis tool that calculates the average price of a stock over a set period of time. By looking at the direction of the moving average line, traders can get an idea of the trend of the stock's price, and can make informed decisions about whether to buy, sell, or hold their positions. A moving average is just one of many indicators that traders may use to determine the direction of a stock's price, but it is a widely used and respected tool in the industry.

Question 16

According to technical analysts, a shift in market fundamentals will ________.
A) be reflected in stock prices immediately
B) lead to a gradual price change that can be recognized as a trend
C) lead to high volatility in stock market prices
D) leave prices unchanged

Accepted Answer

Technical analysts believe that a shift in market fundamentals will lead to a gradual price change that can be recognized as a trend. They look for patterns and trends in stock prices over time and use them to make predictions about future price movements. The belief is that changes in market fundamentals will eventually be reflected in stock prices, but it may take some time for this to happen. High volatility may occur, but typically as a result of other factors, such as market sentiment or unexpected events. Therefore, B is the best choice.

Question 17

If you believed in the reversal effect, you should ________.
A) buy bonds this period if you held stocks last period
B) buy stocks this period that performed poorly last period
C) buy stocks this period that performed well last period
D) do nothing if you held the stock last period

Accepted Answer

The reversal effect suggests that securities that performed poorly in the past period will perform well in the next period. Therefore, buying stocks that performed poorly last period would be the best choice.

Question 18

Technical traders view mutual fund investors as ________ market timers.
A) excellent
B) frequent
C) neutral
D) poor

Accepted Answer

Technical traders believe that mutual fund investors are poor market timers because they tend to buy funds during market peaks and sell during market troughs, which is the opposite of what experienced traders do. This behavior can lead to significant losses and is the reason why technical traders often use mutual fund flows as a contrarian indicator.

Question 19

When technical analysts say a stock has good "relative strength," they mean that in the recent past ________.
A) it has performed well compared to its closest competitors
B) it has exceeded its own historical high
C) trading volume in the stock has exceeded the normal trading volume
D) it has outperformed the market index

Accepted Answer

When technical analysts say a stock has good "relative strength," they mean that in the recent past it has outperformed the market index. This means that the stock has shown strength compared to the overall market.

Question 20

If the utility you derive from your next dollar of wealth increases by less than a loss of a dollar reduces it, you are exhibiting ________.
A) loss aversion
B) regret avoidance
C) mental accounting
D) framing bias

Accepted Answer

This is the definition of loss aversion, where individuals are more sensitive to losses than gains of equal magnitude. It means that the pain of losing a dollar is greater than the pleasure of gaining it, making people less likely to take risks or make investments that could result in losses.

Quiz 9: Behavioral Finance and Technical Analysis

If the put/call ratio increases, market contrarians may interpret this as what kind of signal?

A possible limit on arbitrage activity that may allow behavioral biases to persist is ________.

A ________ is a value above which it is difficult for the market to rise.

It is difficult to test the Kondratieff wave theory because ________.

An important assumption underlying the use of technical analysis techniques is that ________.

On a particular day, there were 890 stocks that advanced on the NYSE and 723 that declined. The volume in advancing issues was 80,846,000, and the volume in declining issues was 70,397,000. The common measure of market breadth is ________.

A point and figure chart: I. Gives a sell signal when the stock price penetrates previous lows II. Tracks significant upward or downward movements III. Has no time dimension IV. Indicates congestion areas

On a particular day, there were 920 stocks that advanced on the NYSE and 723 that declined. The volume in advancing issues was 80,846,000, and the volume in declining issues was 70,397,000. The trin ratio is , and technical analysts are likely to be .

The tendency of investors to hold on to losing investments is called the ________.

According to market technicians, a TRIN statistic of less than 1 is considered a ________.

In technical analysis, ________ is a value below which the market is relatively unlikely to fall.

If you are not a contrarian, you consider a high put/call ratio to be a ________.

________ is a tool that can help identify the direction of a stock's price.

According to technical analysts, a shift in market fundamentals will ________.

If you believed in the reversal effect, you should ________.

Technical traders view mutual fund investors as ________ market timers.

When technical analysts say a stock has good "relative strength," they mean that in the recent past ________.

If the utility you derive from your next dollar of wealth increases by less than a loss of a dollar reduces it, you are exhibiting ________.