Deck 9: Technical Analysis, Market Efficiency and Behavioural Finance

Question 1

What is the ten- day simple moving average if the latest daily closing prices are $5, $7, $8, $5, $4, $6, $7, $8, $9, $10?

A) $6.90
B) $6.00
C) $7.67
D) $10.00

Answer 1

A

Question 2

The odd- lot trading theory advocates that small investors

A) tend to buy high and sell low.
B) are the first to react to market changes.
C) tend to be the first to speculate on a bull market.
D) react in a manner which generally forecasts the future direction of the market.

Answer 2

A

Question 3

Followers of the efficient markets hypothesis believe that

A) very few investors actually analyse or evaluate shares before they make a purchase decision.
B) investors react quickly and accurately to new information.
C) the needed information to assess the market is available only to corporate insiders.
D) individual traders can have a significant impact on the price of a security.

Answer 3

B

Question 4

Technical analysis primarily monitors shifts in the in the market.

A) supply and demand forces
B) rate of return
C) level of risk
D) volume of trading

Question 5

The tendency of investors to blame others for their failures and take personal credit for their successes is referred to as

A) representativeness.
B) narrow framing.
C) loss aversion.
D) biased self- attribution.

Question 6

Which one of the following statements concerning technical indicators is true?

A) The market is considered strong as long as the number of shares that advance in price on a given day is less than the number that decline.
B) The market is expected to increase immediately when the volume of short sales begins to rise.
C) The share market is considered weak when market volume falls during a market decline.
D) The market is expected to continue along its current trend when there is little difference between the volume of odd- lot purchases and sales.

Question 7

A high TRIN value is considered

A) bad for the market when the trading volume in the declining shares is rising.
B) good for the market when the number of advancing shares is declining.
C) bad for the market when the number of declining shares is stable.
D) good for the market when the volume of advancing shares is declining.

Question 8

An efficient market reflects

A) all publicly known information related to past events and announced future events.
B) all information including predictions about future information.
C) only the information related to events that have already occurred.
D) only historical information.

Question 9

Technical analysts consider the share market to be strong when volume in a rising market and during a declining market.

A) decreases; decreases
B) increases; decreases
C) increases; increases
D) decreases; increases

Question 10

The on- balance volume (OBV) indicator

A) rises by 10,000 on a day when the trading volume is 5,000 shares and the price rises by $2.
B) considers only the amount of daily trading volume.
C) indicates an up market when heavy volume accompanies price increases.
D) is divergent when the OBV is falling and prices are also falling.

Question 11

The random walk hypothesis

A) has been disproved based on recent computer simulations.
B) supports the notion that random price movements are indicative of inefficient markets.
C) implies that security analysis is unable to predict future market behaviour.
D) suggests that random patterns appear but only over long periods of time.

Question 12

The Dow Theory

A) is used to predict long- term trends in the market based on confirming actions by the transportation average.
B) concentrates on the secondary trends in both the industrial and the transportation averages.
C) states that the market's performance can be described by long- term price trends.
D) contends that the long- term trend of the market remains constant until the industrial average confirms a shift in direction as first seen in the transportation average.

Question 13

Which one of the following statements concerning the random walk hypothesis is correct?

A) Random price movements support the weak form efficient markets hypothesis.
B) Random price movements indicate that investors can earn abnormal profits on a routine basis.
C) Share prices in general follow repetitive patterns but the actions of individual investors are random in nature.
D) Share price movements are predictable but only over short periods of time.

Question 14

Investors who buy managed funds that have had large gains over the last few years are exhibiting a tendency known as

A) representativeness.
B) overconfidence.
C) loss aversion.
D) narrow framing.

Question 15

The principal objective of technical analysis is

A) determining the best time to get into the market.
B) increasing trading to improve overall profits.
C) avoiding all unpleasant surprises in the market.
D) maintaining the lowest level of risk possible.

Question 16

The strong form of the efficient markets hypothesis contends that

A) no one can consistently earn a profit.
B) abnormal profits are randomly distributed.
C) no one can consistently earn abnormal profits.
D) a select few institutional investors can earn abnormal profits.

Question 17

Investor overconfidence leads to

A) an overestimation of risk.
B) overly optimistic predictions.
C) narrow framing.
D) too little trading.

Question 18

The anomaly known as post- earnings announcement drift or momentum describes the tendency of share prices to rise or fall for several after unexpectedly good or bad earnings announcements.

A) weeks
B) months
C) days
D) hours

Question 19

The on-balance volume (OBV) indicator

A) relates trading volume to the advance- decline spread.
B) is a key leading indicator of future market movements.
C) is used to confirm price trends.
D) is a contradictory indicator.

Question 20

Investors who obsessively monitor their last few stock purchases while paying little attention to the rest of their portfolio are exhibiting the tendency known as

A) loss aversion.
B) representativeness.
C) narrow framing.
D) overconfidence.

Question 21

Which one of the following statements is correct?

A) A point- and- figure chart consists of columns of X's and O's.
B) A point- and- figure chart depicts all of the closing prices of a stock over a period of time.
C) A typical bar chart uses vertical bars to show the closing price as well as the change in price from the previous day.
D) A sell signal occurs when prices break though a resistance line on a chart pattern.

Question 22

Market bubbles such as the technology bubble of the 1990's and the housing bubble of 2004- 2007 are best explained by

A) rational expectations theory.
B) the efficient markets hypothesis.
C) anomaly theory.
D) behavioural finance and economics.

Question 23

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

A) 3.24
B) 0.91
C) 1.10
D) 0.31

Question 24

Which one of the following best describes the term "efficient market"?

A) New information is quickly reflected in security prices.
B) Little time and effort are spent on marketing securities to the public.
C) The cost of receiving, processing, executing, and reporting securities orders is small.
D) The commissions on large transactions are smaller than the commissions on small transactions.

Question 25

The weak form of the efficient markets theory contends that

A) any publicly available information is useless in predicting future price movements.
B) past price performance is useless in predicting future price movements.
C) price movements are not random but follow a general trend over a period of time.
D) past performance can help determine the general direction of future price movements.

Question 26

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

A) 20.
B) 120.
C) - 20.
D) 80.

Question 27

A technical analyst tends to

A) concentrate on a sole market measure to determine market signals.
B) concentrate solely on buy signals in the market.
C) employ multiple market measures in his/her analysis.
D) forward test their theories to validate their validity.

Question 28

People tend to

A) overestimate the effects of random chance.
B) be underconfident in their judgment of investments.
C) look at the entire situation when analysing an individual security.
D) ignore information that contradicts their current beliefs.

Question 29

Followers of the random walk hypothesis believe that

A) support levels and resistance lines, when combined with basic chart formations, yield both buy and sell signals.
B) the price movements of shares follow a "flag" formation such that charting prices can help an investor better time his or her security purchases.
C) the price movements of shares are unpredictable, and therefore security analysis will not help to predict future market behaviour.
D) security analysis is the best tool to utilise when investing in the share market.

Question 30

Evidence suggests that the price of a share continues to move up or down for a period of

A) 6 to 12 months.
B) a decade or more.
C) 1 to 3 years.
D) 3 to 5 years.

Question 31

The confidence index indicates a strong share market when the

A) ratio between the average yield on S&P ASX200 shares to the average yield on high- grade corporate bonds rises.
B) demand for bonds declines relative to the demand for equity securities.
C) consumer confidence index rises above its long- term trend.
D) ratio of the average yield on high- grade corporate bonds to the average yield on low- grade corporate bonds rises.

Question 32

A sell signal is indicated by a security's price

A) running parallel to the moving average.
B) equalling the moving average.
C) rising above the moving average.
D) falling below the moving average.

Question 33

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

A) week.
B) year.
C) decade.
D) quarter.

Question 34

The theory behind the managed fund cash ratio is

A) managed fund managers hold high levels of cash when they are optimistic about market conditions.
B) when managed fund managers hold low levels of cash they are pessimistic about market conditions.
C) when managed fund managers hold high levels of cash, they must eventually buy shares with it.
D) when market conditions are favourable, shareholders remit more cash than the managers can invest.

Question 35

Which of the following are contrary indicators?

A) Short- interest and the advance/decline line.
B) New highs- new lows indicator and the TRIN measure.
C) Breadth of market and market volume.
D) Investment newsletter sentiment index and odd- lot trading.

Question 36

The Dow theory holds that a change in the primary trend has occurred when a rise or fall in the Dow Jones Industrial Averages is confirmed by a similar movement in

A) the market volatility index (VIX).
B) the S&P 500 Index.
C) the Dow Jones Transportation Average.
D) the NASDAQ 100 Index.

Question 37

According to chartists, a breakout below a support level

A) is a signal that the market is stagnant.
B) is a buy signal.
C) is a sell signal.
D) is a buy signal but only for value investors.

Question 38

Which one of the following statements is correct concerning the managed fund cash ratio (MFCR)?

A) The MFCR is equal to the cash inflows into money market funds divided by the cash flows out of money market funds.
B) The lower the value of the MFCR, the stronger the market will be in the future.
C) A MFCR value greater than 12 is considered a bearish signal.
D) A low MFCR indicates that fund managers might be forced to sell securities should investors wish to withdraw funds.

Question 39

One of the most popular tools of technical analysis is

A) charting.
B) investor behaviour analysis.
C) financial statement analysis.
D) investor profiling.

Question 40

Based on the semi- strong form of the efficient markets theory, an investor reacting immediately to a news flash on the television generally

A) will suffer a loss.
B) is too late to make an exceptional profit.
C) is guaranteed to make a reasonable profit.
D) can make an abnormal profit.

Question 41

In an efficient market, prices appear to move randomly because

A) the number of investors who can forecast prices correctly is too small to have any effect.
B) investors do not process new information correctly.
C) insider trading has an unpredictable effect on share prices.
D) only new information affects share prices.

Question 42

Even if the semi- strong form of the efficient markets hypothesis is true, trading on illegal insider information may lead to abnormal profits.

Question 43

A type of managed fund with particular appeal to investors who accept the efficient markets hypothesis is

A) index fund.
B) growth opportunities fund.
C) asset allocation fund.
D) emerging markets fund.

Question 44

Fund managers tend to have too little confidence in their abilities leading them to be excessively cautious.

Question 45

The tendency of investors to take greater risks after a large loss and fewer risks after a large gain can be attributed to

A) loss aversion.
B) representativeness.
C) overconfidence.
D) the "house money" effect.

Question 46

Recent academic studies in behavioural finance confirm that markets are even more efficient than previously believed.

Question 47

Which one of the following statements is correct concerning moving averages?

A) The longer the time period under consideration, the more sensitive the moving average is to daily price fluctuations.
B) The shorter the time period under consideration, the easier it is to spot long- term price trends.
C) A moving average helps remove short- term fluctuations from the analysis.
D) A simple moving average is computed as the arithmetic mode.

Question 48

Which of the following activities would be most useful in an efficient market.

A) Buying only securities that have performed well in the recent past.
B) Buying and holding a diversified portfolio.
C) Analysing financial ratios based on accounting data.
D) Searching for patterns in charts based on share price movements.

Question 49

Chartists advocate that

A) formations are less important than the direction of the latest price movement.
B) history repeats itself.
C) patterns appear that are very clear and distinctive.
D) a breakout below a support line is a buy signal.

Question 50

Advocates of the weak- form efficient markets hypothesis claim that past price movements are the best predictors of future price movements.

Question 51

Investors should never combine fundamental analysis and technical analysis.

Question 52

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

Question 53

Point- and- figure charts and moving averages both reduce the effect of random, short- term market fluctuations.

Question 54

One type of chart designed to keep track of emerging price patterns which has no time dimension and uses a series of X's and O's is known as a

A) flagged movement chart.
B) peak- and- trough chart.
C) bear- and- bull chart.
D) point- and- figure chart.

Question 55

Individuals tend to invest in managed funds that have recently been performing well.

Question 56

For technical analysts, the forces of supply and demand have an important effect on the prices of securities.

Question 57

There is evidence to support the contention that company insiders

A) have no distinct advantage when trading shares of their company's share.
B) cannot earn abnormal profits because they are not permitted to trade shares in their company's share.
C) generally earn a profit equal to that of public investors.
D) can profit in a manner that counters the strong form of the efficient markets hypothesis.

Question 58

Available evidence does not support the strong form of the efficient markets hypothesis.

Question 59

The tendency to hold onto losing shares in the hope that they will recoup is called

A) biased self- attribution.
B) representativeness.
C) loss aversion.
D) narrow framing.

Question 60

Evidence suggests that growth shares tend to outperform value shares.

Question 61

Charts are only used to confirm past trends.

Question 62

The odd- lot theory supports buying into the market when the number of odd- lot trades rises.

Question 63

Resources for technical analysis are readily available on the Internet.

Question 64

The Dow Theory is used to predict when the markets will change direction based on the long- term trends in the market.

Question 65

In an efficient market, fundamental analysis still provides value to an investor.

Question 66

The efficient markets hypothesis means that trades can be executed quickly, easily, and inexpensively.

Question 67

Investors skilled in exploiting behavioural errors and market anomalies can consistently outperform the market by a wide margin.

Question 68

The simple moving average is a weighted average.

Question 69

You are most likely better off doing the opposite of what most investment newsletter experts advise doing.

Question 70

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

Question 71

An oversold market is generally considered to be overvalued.

Question 72

The market reaction to quarterly earnings announcements tends to support the strong form of the efficient markets hypothesis.

Question 73

Market volume is a function of market demand for and supply of shares.

Question 74

A relatively high level of short sells is an indicator of a current bull market.

Question 75

The breadth of the market refers to the spread between the number of shares advancing and those declining in value.

Question 76

Analysts tend to issue similar recommendations on individual securities.

Question 77

A principal objective of technical analysis is trying to determine when to invest.

Question 78

Some behavioural characteristics cause investors to realise lower investment returns.

Question 79

In an efficient market, the only means of achieving high returns is to invest in high- risk securities.

Question 80

Charts are useful as a means of spotting developing trends.