Deck 7: Forecasting Share Price Movements

Question 1

If there were an appreciation of the exchange rate of a local currency against the USD,then _____ from _____ sales would be _____ than if the exchange rate had remained constant.

A) profits; increased exports; less
B) losses; increased exports; less
C) profits; increased exports; more
D) losses; decreased imports; more

Answer 1

C

Question 2

Some of the factors that are used by analysts using the top-down approach in the analysis of fundamentals affecting share prices are:

A) exchange rates.
B) interest rates.
C) rate of growth in international economies.
D) all of the given answers.

Answer 2

D

Question 3

If investors _______ a company's shares,the _______ supply is likely to lead to a _______ in the share price.

A) buy; increased; rise
B) buy; decreased; fall
C) sell; increased; fall
D) sell; decreased; rise

Answer 3

C

Question 4

Firm-specific financial indicators used in fundamental analysis top-down approach are:

A) interest rates.
B) consumer confidence.
C) return on assets.
D) business cycle.

Question 5

The investment approach that focuses on the underlying determinants of future profitability rather than on past price movements of a company's stock is:

A) credit analysis.
B) fundamental analysis.
C) systems analysis.
D) technical analysis.

Question 6

Which of the following is NOT a problem that may be associated with rapid,unsustainable growth in an economy?

A) An upward pressure on wages
B) An increase in inflationary pressures
C) An improvement in the current account of the balance of payments
D) A rise in interest rates

Question 7

The net record of a country's international earnings less its international payments is its:

A) capital account.
B) current account.
C) Gross Domestic Product.
D) gross national income.

Question 8

Writing down the value of a capital asset,reported as an expense,is called:

A) downgrading.
B) depreciation.
C) documentation.
D) reduction.

Question 9

The approach that seeks to identify factors that are likely to influence the growth rate and future profits of a company is called:

A) economic analysis.
B) factor analysis.
C) fundamental analysis.
D) technical analysis.

Question 10

In relation to a country's economy,if a country's current account deteriorates,the government is likely to:

A) loosen monetary policy.
B) increase government expenditure.
C) tighten interest rates.
D) lower taxes.

Question 11

In relation to fundamental analysis,which of the following is NOT a problem associated with rapid,unsustainable economic growth?

A) GDP growth between 1 and 2%
B) Current account of the balance of payments worsens
C) Pressure on wage growth falls
D) Inflationary pressures increase

Question 12

Investment analysts use a number of approaches in the analysis of fundamentals that may affect share prices.Which of the following statements in relation to the bottom-up approach to share price analysis is MOST correct? The bottom-up approach:

A) identifies the level of systematic risk within industry sectors.
B) is applied to select specific firms from within desired industry sectors.
C) indicates a well-diversified portfolio that eliminates unsystematic risk.
D) provides investment indicators based on forecast financial ratios.

Question 13

An investor seeks to compare the financial characteristics of four companies that are investment possibilities.Based solely on the data provided in the following ratios,which company would provide the lowest investment risk? $$\begin{array} { | l | l | l | l | l l } \hline { \text { Ratio } } & { \text { Company A } } & { \text { Company B } } & { \text { Company C } } & { \text { Company D } } \\\hline \text { Current } & 1.80 & 1.55 & 1.85 & 1.10 & \\\hline \text { Proprietorship } & 65.00 \% & 45.75 \% & 71.00 \% & 31.50 \% \\\hline \text { EBIT/long-term funds } & 18.50 \% & 14.60 \% & 17.00 \% & 15.50 \% \\\hline \text { Return on shareholders funds } & 14.50 \% & 11.50 \% & 14.50 \% & \\\hline \text { Debt/gross cash flow } & 4.91 \text { (years) } & 2.80 \text { (years) } & 2.91 \text { (years) } & 3.85 \text { (years) } \\\hline \text { Interest cover } & 3.00 \text { (times) } & 2.10 \text { (times) } & 3.10 \text { (times) } & 2.30 \text { (times) } \\\hline \text { P/E } & 19.50 \text { (times) } & 7.70 \text { (times) } & 5.21 \text { (times) } & 12.10 \text { (times) } \\\hline \text { NTA/price } & 1.02 \text { (times) } & 0.96 \text { times) } & 1.00 \text { (times) } & 0.99 \text { (times) } \\\hline\end{array}$$

A) Company A
B) Company B
C) Company C
D) Company D

Question 14

If a company's shares are expected to perform better than other companies in the same industry,there will be _______ for the company shares and a ____ in the share price.

A) increased demand; rise
B) decreased demand; rise
C) increased supply; fall
D) decreased supply; fall

Question 15

The portion of the overall economy defined by the nature of a company's operations is called the:

A) economic component.
B) company component.
C) industry sector.
D) country sector.

Question 16

When an investor makes their investment decision based on a company's accounting ratios,they are using:

A) economic analysis.
B) factor analysis.
C) fundamental analysis.
D) technical analysis.

Question 17

In relation to a country's economy,the more a country imports and the worse the current account becomes,the:

A) more the currency increases.
B) lower interest rates fall.
C) lower foreign debt becomes.
D) higher foreign debt becomes.

Question 18

Investment analysts use a number of approaches in the analysis of fundamentals that may affect share prices.Which of the following statements in relation to the top-down approach to share price analysis is MOST correct? The top-down approach:

A) identifies specific firms to include in an investment portfolio.
B) provides a measure of the level of unsystematic risk in the market.
C) compares the performance of firms through financial ratio analysis.
D) identifies future economic factors that may impact on industry sector performance.

Question 19

The investment approach that evaluates and interprets past share price movements is:

A) credit analysis.
B) technical analysis.
C) fundamental analysis.
D) systematic analysis.

Question 20

Foreign exchange risk is best described as the:

A) variability in the current account balance of the balance of payments.
B) cost of one currency in terms of another.
C) risk that the price of one currency relative to another currency will change.
D) variability of domestic and international interest rates.

Question 21

A graph of average price series constructed over time is called a:

A) chart.
B) average time series.
C) moving average.
D) technical line.

Question 22

_______ is a mathematical technique used by technical analysts to clearly reveal all the trends in a price series.

A) Averaging
B) Moving average
C) Price averaging
D) Series averaging

Question 23

When investors use past share price movements to make their investment decisions,they are using:

A) economic analysis.
B) factor analysis.
C) fundamental analysis.
D) technical analysis.

Question 24

In technical analysis,when the lower points of a rising price series are connected this is a:

A) downward trend line.
B) moving average.
C) upward trend line.
D) weighted moving average.

Question 25

When the share price series breaks through a flattening moving average line from above,a technical analyst would probably suggest it is a good time to:

A) buy the share.
B) sell the share.
C) hold the share.
D) short the share.

Question 26

Technical analysts basically believe that security prices:

A) react rapidly to new information, and share market prices are determined by the interaction of demand and supply.
B) react rapidly to new information, and security dealers provide liquidity.
C) react gradually to new information, and market prices are determined by the interaction of supply and demand.
D) react gradually to new information, and security dealers provide liquidity.

Question 27

When the share price series breaks through the moving average line from below,a technical analyst would probably suggest it is a good time to:

A) buy the share.
B) sell the share.
C) hold the share.
D) short the share.

Question 28

In relation to technical analysis,a support level is:

A) a level beyond which the market is unlikely to rise.
B) a level below which the market is unlikely to fall.
C) an equilibrium price level supported by earnings and cash flows.
D) the complete cycle of a market wave.

Question 29

Compared with fundamental analysis,technical analysis focuses on:

A) accounting ratios.
B) forecasting a company's future profitability.
C) forecasting a company's technical ratios.
D) share price movements.

Question 30

The lower the degree of unsystematic risk,the:

A) higher the diversification of a share portfolio.
B) lower a share's beta coefficient.
C) higher a share's beta coefficient.
D) lower the diversification of a share portfolio.

Question 31

The investment approach that focuses more on past price movements of a company's stock than on the underlying determinants of future profitability is:

A) credit analysis.
B) fundamental analysis.
C) systems analysis.
D) technical analysis.

Question 32

Once the actual price and moving average (MA)series are plotted on the same graph,buy and sell signals are generated.So:

A) buy when the actual price series cuts the MA from below, especially if the MA has been flat or in a gentle decline.
B) sell when the MA series is rising strongly and the price series cuts or touches the MA from above, but then moves back above the MA after only a few observations.
C) sell when the MA flattens or declines after a steady rise, and the price series cuts the MA from above.
D) buy when the MA series is rising strongly and the price series cuts or touches the MA from above, but then moves back above the MA after only a few observations.

Question 33

An investor who buys a large number of shares from different companies and from many different industries will:

A) abolish systematic risk.
B) minimise unsystematic risk.
C) minimise credit risk.
D) minimise price risk.

Question 34

The greater the degree of systematic risk,the:

A) higher the expected share price.
B) higher the expected rate of return.
C) lower the expected return on a share.
D) closer a share's beta will be to 1.

Question 35

According to modern portfolio theory,the _______ the degree of systematic risk,the _______ should be the expected return.

A) smaller; greater.
B) greater; greater.
C) smaller; smaller.
D) greater; smaller.

Question 36

Compared with technical analysis,fundamental analysis considers the:

A) fundamentals of price movements only.
B) fundamentals of companies only.
C) factors that influence a company only.
D) factors that influence a company and the overall market.

Question 37

An analyst constructs a moving average line in order to:

A) forecast future cash earnings of a company.
B) analyse support and resistance lines.
C) smooth out erratic price movements.
D) work out the efficiency of the market.

Question 38

An alternative approach to forecasting the behaviour of share prices is technical analysis.Which of the following statements in relation to the approach taken by technical analysts is incorrect?

A) As a price pattern emerges, it is assumed that the historical pattern will re-emerge in full.
B) The stock markets are, at times, dominated by mass psychology.
C) Historical price patterns are of little use in forecasting future price movements.
D) Analysts typically adopt either a 'technical' or a 'fundamental' approach.

Question 39

An important belief underlying the use of technical analysis techniques is that:

A) security prices react rapidly to new information.
B) security prices react gradually to new information.
C) there are sufficient investors in the market to provide enough liquidity to keep price changes relatively small.
D) all investors have immediate and relatively low-cost access to information.

Question 40

Daily share-price data is given over a seven-day period for a company.Calculate the five-day moving average over the period. 14 June:
$6)75
15 June:
$6)80
16 June:
$6)94
17 June:
$6)58
18 June:
$6)23
21 June:
$5)95
22 June:
$5)80

A) $6.23; $5.95; $5.80
B) $6.23; $6.50; $6.44
C) $6.66; $6.50; $6.30
D) $6.66; $6.54; $6.44

Question 41

Which of the following statements regarding an efficient capital market is correct?

A) All securities that investors would like to invest in are listed.
B) All transactions are closed out and settled within two days.
C) Current prices reflect all current information.
D) The lowest interest rates are offered.

Question 42

If a share price falls on four consecutive days of trading,share prices:

A) cannot be following a random walk
B) can still be following a random walk
C) are almost certain to decrease the next day
D) are almost certain to increase the next day

Question 43

For technical analysts,the pattern formed by a series of price fluctuations characterised by rising bottoms and horizontal tops is a/an:

A) ascending triangle.
B) symmetrical triangle.
C) descending triangle.
D) a pennant.

Question 44

Strategies based on technical analysis are most likely to be profitable in a market that is regarded as:

A) following a random walk.
B) semi-strong efficient.
C) not strong-form efficient.
D) not weak-form efficient.

Question 45

For technical analysts,the pattern formed by a series of price fluctuations composed with each top and bottom smaller than its predecessor and with transaction volumes usually diminishing is a/an:

A) ascending triangle.
B) symmetrical triangle.
C) descending triangle.
D) pole.

Question 46

In relation to share trading,buy and sell orders automatically triggered by rules entered into a computer program are called:

A) high frequency trading.
B) intraday trading.
C) program trading.
D) flash trading.

Question 47

In technical analysis,a price level below which the market price is temporarily unlikely to rise is a:

A) trend channel.
B) resistance line.
C) support line.
D) trend line.

Question 48

A support/resistance pattern plotted by chartists in the stock markets is the rectangle,which consists of sideways price fluctuations contained within horizontal support and resistance levels.Which of the following statements in relation to indicators given by support and resistance rectangles is incorrect?

A) Rectangles tend to be characterised by increasing volumes, except for a few days before the breakout when there are strong decreases in volumes of trade in the share(s).
B) If the last bottom does not touch the support level (beginning the formation of an ascending triangle) and if prices then rise rapidly on increasing volume, it is likely that there will be a topside breakout.
C) If the tops fail to reach resistance levels, beginning the formation of a descending triangle, a downside breakout is likely.
D) When a break occurs from a rectangle, the extent of the breakout is likely to equal the height of the price rectangle.

Question 49

In an efficient market:

A) security prices are seldom far above or below their justified level.
B) share prices react quickly to new information.
C) investors will not make superior returns consistently.
D) All of the given answers are correct.

Question 50

In technical analysis,a price level below which the market price is temporarily unlikely to fall is a:

A) trend channel.
B) resistance line.
C) support line.
D) trend line.

Question 51

The Elliot wave theory maintains that the bullish behaviour of the share market can be explained as:

A) a series of medium-term and long-term waves.
B) a series of long-term waves upwards, and short-term waves downwards.
C) a series of three major waves upwards, followed by two major waves downwards.
D) none of the given answers.

Question 52

For technical analysts,the pattern formed by three successive rallies with the second rally being greater than the first or third,is called a:

A) symmetrical triangle.
B) head and shoulder pattern.
C) breakout.
D) triple top.

Question 53

In relation to share trading,a dedicated system that operates within an exchange allowing some institutional investors to place large buy or sell orders without having to disclose the whole trade to the exchange are:

A) high frequency trading.
B) intraday trading.
C) program trading.
D) dark pools.

Question 54

The weak form of the efficient market hypothesis asserts that:

A) the change in future share prices cannot be predicted from past share prices.
B) share prices adjust rapidly to new information contained in past prices or past data.
C) technical analysts cannot be expected to outperform the market.
D) all of the given answers are correct.

Question 55

In relation to stock exchanges,the term 'flash trading' refers to:

A) applications of high-speed supercomputers that can place thousands of orders in seconds and then immediately cancel them.
B) some institutional investors being able to place large buy orders without having to disclose the whole trade to the exchange.
C) pennants and flags patterns in very fast moving markets.
D) the trades of certain institutional investors that receive information from a stock exchange of incoming orders before other traders.

Question 56

In relation to charting,an upward trend line connects the _______ points of a _______ price series,while a downward trend connects the _______ points of a _______ price series.

A) upper; rising; higher; falling
B) lower; rising; higher; falling
C) upper; falling; lower; rising
D) lower; falling; upper; rising

Question 57

In relation to technical analysis,what is the level above which the market finds it difficult to rise?

A) Trend channel
B) Resistance level
C) Support level
D) None of the given answers are correct

Question 58

One of the theories on the determination of,and change in the value of,shares and other securities is the random walk hypothesis.Which of the following statements in relation to the random walk hypothesis is correct?

A) The trend of new information into the market may be consistently good or consistently bad over time.
B) If the price of a share rose in one period, there is a higher probability that it will rise again in the next period.
C) Share price reflects the share's intrinsic value, based on the latest information set relevant to current and future prospects.
D) The history of previous price movements contains valuable information on likely future price movements.

Question 59

Program trading:

A) is the most likely reason there was a stock market crash in October 1987.
B) occurs only in over-the-counter markets.
C) refers to computer-generated orders to buy or sell many shares at the same time.
D) has been abolished by order of the ASX.

Question 60

If the weak form of the efficient market hypothesis holds:

A) share prices follow a random walk.
B) share prices reflect all information contained in past prices.
C) technical analysis is useless.
D) all of the given answers are correct.

Question 61

Research of actively managed portfolios,managed by professional portfolio managers:

A) indicates that one should not randomly select managed portfolios managed by professional portfolio managers.
B) indicates that historical performance is a good indicator of future performance.
C) indicates that professional management provides investors with superior market returns.
D) indicates the majority of professional portfolio managers outperform the market.

Question 62

In relation to behavioural finance,if an investor is influenced by the manner in which an investment opportunity is presented this is called:

A) trading noise.
B) herding instinct.
C) framing behaviour.
D) disposition effect.

Question 63

Which of the following statements is correct?

A) If the share market follows a random walk, price changes should be highly correlated.
B) A random walk for share price changes is inconsistent with observed patterns in price changes.
C) If the share market is weak-form efficient, the share prices follow a random walk
D) All of the given answers are correct.

Question 64

At which level of market efficiency does the efficient market hypothesis support the technical analysis approach to future share price determination?

A) Weak-form efficiency
B) Semi-strong form efficiency
C) Strong-form efficiency
D) None of the given answers

Question 65

If you believe that share prices reflect all information that can be derived from examining the market trading data such as the history of past share prices,which form of efficient market hypothesis do you believe in?

A) Weak.
B) Semi-strong.
C) Strong.
D) Informational.

Question 66

When new information becomes public in the market,evidence suggests that:

A) transaction costs will erase any benefit of trading on the new information.
B) insiders will be the only investors to gain.
C) it takes at least three trading days for share prices to adjust.
D) share prices adjust rapidly to the new information.

Question 67

If you believe that share prices reflect all relevant information,including publicly available information,which form of the efficient market hypothesis do you believe in?

A) Weak.
B) Semi-strong.
C) Strong.
D) Informational.

Question 68

In relation to behavioural finance,if an investor is influenced to follow other investors into certain investment opportunities,this is called:

A) trading noise.
B) herding instinct.
C) framing behaviour.
D) disposition effect.

Question 69

When investors cannot make superior profits on a continual basis based on past prices,public or private information,the market is said to be:

A) weak-form efficient.
B) semi-strong form efficient.
C) strong-form efficient.
D) fundamentally efficient.

Question 70

An investor finds that for a particular group of shares,large positive price changes are always followed by large negative price changes.This finding violates:

A) the strong form of the efficient market hypothesis.
B) the semi-strong form of the efficient market hypothesis.
C) the weak form of the efficient market hypothesis.
D) none of the given choices.

Question 71

The weak form of the efficient market hypothesis denies the use of:

A) technical analysis, but supports fundamental analysis as valid.
B) fundamental analysis, but supports technical analysis as valid.
C) both technical analysis and fundamental analysis.
D) technical analysis, but is silent on the possibility of successful fundamental analysis.

Question 72

If share prices appear to follow a random walk:

A) selecting shares for portfolios is irrelevant.
B) investment analysts are unimportant.
C) successive share price changes are unpredictable.
D) it is impossible to know when to buy shares.

Question 73

Proponents of the efficient market hypothesis assert that technical analysts:

A) should focus on resistance levels.
B) should focus on relative strength.
C) should focus on support levels.
D) are wasting their time and money.

Question 74

The strong form of the efficient market hypothesis states that:

A) security prices reflect all publicly available information.
B) major market events can be predicted using publicly available information.
C) insider information contains no special advantage.
D) future prices are predictable.

Question 75

Research indicates that the correlation coefficient between successive days' share price changes is:

A) quite close to +1.
B) quite close to zero.
C) quite close to -1.
D) directly related to the share's beta.

Question 76

The semi-strong form of the efficient market hypothesis states that:

A) future share prices are predictable.
B) all available information is reflected in the price of securities.
C) security prices reflect all publicly available information.
D) None of the given choices are correct.

Question 77

If you believe that share prices reflect all relevant information including information that is available only to insiders,which form of the efficient market hypothesis do you believe in?

A) Weak.
B) Semi-strong.
C) Strong.
D) Informational.

Question 78

In relation to behavioural finance,if investors do not seek to maximise returns on investments but are quite willing to accept a lesser outcome or return,it is called:

A) trading noise.
B) herding instinct.
C) framing behaviour.
D) heuristic behaviour.

Question 79

Which group of investors is able to earn consistent superior profits if the financial markets are strong-form efficient?

A) Only fundamental analysts will be able to profit
B) Only technical analysts will be able to profit
C) Only specialists, analysts and insiders in the company will be able to profit
D) No one will be able to sustain superior profits

Question 80

It may be argued that share prices on the Australian Securities Exchange (ASX)reflect all publicly available,relevant information regarding listed companies,and therefore superior profits cannot be made by an investor using publicly available information.Based on the above contention,which of the following statements best describes the informational efficiency of the ASX?

A) Strong-form efficiency.
B) Semi-strong form efficiency.
C) Weak-form efficiency.
D) Random walk efficiency.