Question 1

The theory behind the mutual fund cash ratio is

Accepted Answer

The mutual fund cash ratio is the percentage of a mutual fund's assets that is held in cash or cash equivalents. The theory behind this ratio is that when mutual fund managers hold a high level of cash, they must eventually buy stocks with it in order to stay fully invested. This is because mutual funds have a mandate to invest their assets in accordance with their investment objectives, and holding too much cash can result in underperformance relative to their benchmark or peer group. Therefore, a high cash ratio is typically interpreted as a sign that the fund manager is bearish on the market or has a high level of uncertainty about the future direction of the market. Conversely, a low cash ratio is typically interpreted as a sign that the fund manager is bullish on the market or has a high level of conviction about the future direction of the market.

Question 2

The mutual fund cash ratio (MFCR) compares the percentage of an investor's portfolio held in cash to the percentage held in mutual funds.

Accepted Answer

The mutual fund cash ratio (MFCR) measures the cash reserves of mutual funds as a percentage of their total assets, indicating their ability to meet redemptions or invest in new opportunities, not the cash versus mutual funds in an investor's portfolio.

Question 3

The purpose of moving averages is to reduce the effect of random, short-term market fluctuations.

Accepted Answer

Moving averages are calculated by smoothing out the price data over a period of time, which minimizes the impact of small, temporary shifts in the market. This makes it easier to identify trends and establish a clearer picture of the longer-term direction of the market.

Question 4

The advance/decline line is be used to time both the purchase and the sale of securities.

Accepted Answer

The advance/decline line is a technical analysis tool that tracks the number of advancing stocks versus the number of declining stocks over a given period of time. This can help investors and traders gauge the overall health of the market and make decisions about when to buy or sell securities. The advance/decline line can be used to time both the purchase and sale of securities, making it a versatile tool for market analysis.

Question 5

A technical analyst tends to

Accepted Answer

A technical analyst typically uses multiple market measures, such as price charts, moving averages, and technical indicators, to analyze market trends and make trading decisions. This approach allows for a more comprehensive analysis of market conditions and reduces the reliance on any single indicator or signal. Forward testing is also important for validating the effectiveness of the analyst's strategies.

Question 6

Charts are only used to confirm past trends.

Accepted Answer

Charts can be used not only to confirm past trends but also to predict future trends or identify patterns and relationships in data.

Question 7

Chartists advocate that

Accepted Answer

The answer of Chartists advocate that
...

Question 8

Which one of the following combinations best signals a strong market?
I. a greater number of advancing stocks than declining stocks
II. a greater number of declining stocks than advancing stocks
III. a greater volume in rising stocks than in declining stocks
IV. a greater volume in declining stocks than in advancing stocks

Accepted Answer

In a strong market, the number of advancing stocks should be greater than the number of declining stocks, indicating overall positive sentiment among investors. Additionally, a stronger volume in rising stocks compared to declining stocks suggests that there is significant buying activity in the market, further reinforcing the idea of a strong market. Therefore, choice A, which includes both I and III, best signals a strong market.

Question 9

The relative strength index compares a security's price relative to itself over a period of time.

Accepted Answer

The relative strength index (RSI) is a technical indicator that measures the strength of a security's price relative to itself over a period of time, typically 14 days. It is calculated using the average gain and loss over the time period, and is expressed on a scale of 0-100. A reading below 30 is considered oversold, while a reading above 70 is considered overbought.

Question 10

The simple moving average is a weighted average.

Accepted Answer

The simple moving average is not a weighted average, as each data point within the moving average is given equal weight.

Question 11

Which one of the following relative strength values would most indicate that a stock is oversold?

Accepted Answer

A relative strength value of 20 indicates that a stock is oversold, meaning it has experienced a recent decline in price and may be undervalued. A value of 120 or more would indicate the stock is overbought, meaning it has experienced a recent increase in price and may be overvalued. A value of 80 would be considered normal or average. A negative value (-20) would not indicate oversold conditions, but rather underperformance compared to the market benchmark.

Question 12

On a given trading day, 700 stocks advanced and 1,200 stocks declined. The volume of declining stocks was 280 million while the volume of advancing stocks was 530 million. What is the TRIN value for the day?

Accepted Answer

The TRIN (Trading Index) is calculated as (Advancing Issues / Declining Issues) / (Advancing Volume / Declining Volume). Here, TRIN = (700/1200) / (530/280) = 0.31.

Question 13

Technical analysts believe that some of the key elements of market behavior-called technical indicators-can provide valuable insights about the condition of the market. Briefly discuss each of the following indicators.
∙ Market volume
∙ Breadth of the market
∙ Short-interest
∙ Odd-lot trading

Accepted Answer

The answer of Technical analysts believe that some of the...

Question 14

The on balance volume (OBV) indicator

Accepted Answer

The on balance volume (OBV) indicator considers the relationship between price and volume, and indicates an up market when heavy volume accompanies price increases. Option A is incorrect as OBV considers both volume and price. Option C is incorrect as OBV will be congruent when both the indicator and the prices are falling. Option D is incorrect as the calculation is erroneous; the OBV change should be calculated as (5,000 x $2) + previous OBV value, which is not provided.

Question 15

The new highs-new lows indicator is based on prices over the past

Accepted Answer

The new highs-new lows indicator measures the number of securities that have reached a new 52-week high compared to the number of securities that have reached a new 52-week low. Therefore, it is based on prices over the past 52 weeks.

Question 16

The confidence index indicates a strong stock market when the

Accepted Answer

The answer of The confidence index indicates a strong stock...

Question 17

Charts are useful as a means of spotting developing trends.

Accepted Answer

Charts can be effective tools for identifying patterns and trends over time, making them useful for businesses, investors, and researchers to make strategic decisions or predictions.

Question 18

A high TRIN value is considered

Accepted Answer

TRIN (also known as ARMS index) is calculated using the ratio of the number of advancing stocks to the number of declining stocks and the ratio of the volume of advancing stocks to the volume of declining stocks. A high TRIN value indicates that the trading volume in the declining stocks is rising, which is a bearish signal for the market. Therefore, option C is the correct choice.

Question 19

The confidence index indicates

Accepted Answer

The confidence index is typically used to gauge bond investors' perceptions of risk in the economy. It reflects their confidence in the economic environment, particularly in terms of the stability and potential for growth, which influences their investment decisions in the bond market.

Question 20

One of the most popular tools of technical analysis is

Accepted Answer

Technical analysis involves the analysis of historical price and volume data by using charts and other tools to identify patterns and trends. Charting is a key component of technical analysis and is used to identify support and resistance levels, trend lines, and other important indicators. B) financial statement analysis is a tool used in fundamental analysis, which involves the analysis of a company's financial statements, management team, and industry to determine its intrinsic value. C) investor profiling is a tool used to identify an investor's risk tolerance, investment goals, and other key factors that may influence their investment decisions. It is not a tool of technical analysis. D) investor behavior analysis is a tool used to study how investors make decisions and how their behavior affects financial markets. While it is related to technical analysis, it is not a tool used in the analysis of price and volume data.

Quiz 9: Market Efficiency and Behavioral Finance