Question 1

You find that the TRIN ratio is up, the market breadth is down, and the market has closed below its 50-day moving average. In total, how many bearish signs do you have?

Accepted Answer

All three indicators mentioned are bearish signs: a rising TRIN ratio suggests more declining stocks, a downward market breadth indicates more decliners than advancers, and closing below the 50-day moving average is a bearish technical signal.

Question 2

At the beginning of the month, the healthcare index was 134 and the stock market index was 2100. At the end of the month, the healthcare index was 147 and the stock market index was 2214. Consider the ratio of the healthcare index to the market index at the beginning and end of the month. The healthcare index is ________ the market index, and technical analysts who use relative strength would advise ________ the healthcare index.

Accepted Answer

The ratio of the healthcare index to the market index at the beginning of the month is 134/2100, which simplifies to 0.0638. At the end of the month, the ratio is 147/2214, which simplifies to 0.0664. This shows that the healthcare index outperformed the market index over the course of the month. Therefore, choice C (outperforming; buying) is the correct answer.

Question 3

The price of a stock fluctuates over a period of 10 days. The movement of the stock price below the 10-day minimum price of $25 triggers a rash of selling. The $25 price might now be considered the ________.

Accepted Answer

The answer of The price of a stock fluctuates over...

Question 4

Which of the following case studies illustrates a limit to arbitrage as discussed in the text?

Accepted Answer

All of the given options illustrate limits to arbitrage, as discussed in the text.

A) "Siamese twin" companies refers to companies with a dual-class share structure, where one class has superior voting rights. This makes it difficult for investors to take control of the company and steer it in a different direction.

B) Equity carve-outs refer to when a parent company sells a minority stake in one of its subsidiaries to the public. The valuation of the subsidiary may not reflect its true value, and the parent company may have information asymmetry that makes it difficult for investors to determine the correct value.

C) Closed-end funds trade at a price that may deviate from their net asset value due to supply and demand factors, creating opportunities for arbitrageurs to buy low and sell high. However, there may not be enough liquidity or willingness to take the other side of the trade, limiting arbitrage opportunities.

Therefore, all of the options demonstrate limits to arbitrage, making D the correct answer.

Question 5

Trend analysts who follow bonds are most likely to monitor the ________.

Accepted Answer

The confidence index is a measure used by trend analysts who follow bonds because it reflects the spread between yields on high-grade bonds versus those on low-grade bonds, indicating investor confidence in the bond market.

Question 6

High P/E firms tend to be poor investments. This illustrates which of the following information processing errors?

Accepted Answer

Forecasting error is illustrated by the belief that high P/E firms tend to be poor investments, as it involves making incorrect predictions about the future performance of these firms based on their current price-to-earnings ratios.

Question 7

Statman, Fisher, and Anginer (2008) found that stocks ranked high in Fortune's Survey of Most Admired Companies tended to have lower average risk-adjusted returns than the least admired firms. This could be attributed to

Accepted Answer

The findings suggest that investors may be willing to pay a premium for stocks of companies they admire, which can lead to affect-driven decision making and lower risk-adjusted returns. Affect refers to emotions or feelings that can influence decision making.

Question 8

You find that the confidence index is down, the market breadth is up, and the trin ratio is down. In total, how many bullish signs do you have?

Accepted Answer

The market breadth being up is a bullish signal, and a decreasing TRIN ratio is also a bullish signal. However, the decreasing confidence index is a bearish signal. Therefore, there are two bullish signals (market breadth and TRIN ratio) and one bearish signal (confidence index), making the correct answer choice (C) 2.

Question 9

The moving average generates sell signals ________.

Accepted Answer

The moving average generates a sell signal when the price falls below the moving average. Looking at the chart, the moving average is a 5-day moving average. The price falls below the moving average on days 7, 15, and 18. Therefore, choice B is the correct answer.

Quiz 9: Behavioral Finance and Technical Analysis