The short-interest ratio

Question

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The short-interest ratio measures the number of shares that have been sold short, or borrowed and sold in anticipation of buying them back at a lower price. It is calculated by dividing the total number of shares sold short by the average daily trading volume. A high short-interest ratio may indicate that there are a lot of investors betting against the stock, which could lead to a subsequent increase in price if they are caught off guard and need to buy shares to cover their short positions. Conversely, a low short-interest ratio could suggest that investors are bullish on the stock and are not expecting a significant price decline in the near term. Therefore, the short-interest ratio may be used to forecast subsequent movements in the price of a stock. Choice A is incorrect because the short-interest ratio is a ratio, not a measure of shares sold each day. Choice C is incorrect because an increase in the short-interest ratio actually suggests that short sellers expect the price of the stock to fall, not rise. Choice D is incorrect because a reduction in the short-interest ratio could suggest that short sellers are buying back shares to cover their positions, which could lead to a price increase, rather than stability.

The Short-Interest Ratio