Chapter 13 Fundamental and Technical Analysis RQ Flashcards
Identify the theory that suggests that investors make intelligent decisions after weighing all available information?
A. Efficient market hypothesis.
B. Random walk theory.
C. Rational expectations hypothesis.
D. Technical analysis.
C. Rational expectations hypothesis.
The Rational Expectations Hypothesis assumes that people are rational and make intelligent economic decisions after weighing all available information.
Identify the stage when an industry has sales and earnings that are consistently expanding at a faster rate than most other industries and the economy?
A. Growth.
B. Initial growth.
C. Mature.
D. Emerging growth.
A. Growth.
Growth industries have sales and earnings that are consistently expanding at a faster rate than most other industries. Although emerging growth industries may experience strong growth during this phase, there is also greater volatility and they may not be profitable at first. This volatility may lead to a less consistent path of growth than that of a growth industry.
Samra believes that the Canadian dollar is going to decline in the future. What type of industry would you recommend she invest in?
A. Defensive Industries.
B. Speculative Industries.
C. Cyclical Industries.
D. Mature Industries
C. Cyclical Industries.
Most cyclical industries benefit from a decline in the value of the Canadian dollar because exports become cheaper for international buyers. However, the rate of expansion or contraction in the U.S. business cycle is still the single greatest influence in determining the profitability of cyclical companies. Currency values remain an important secondary factor.
Identify the issues that support the argument that capital markets are inefficient.
New information is not available to everyone at the same time.
Investors react in the same way, making it difficult to execute trades as all investors want to be on the same side of the market.
Investor psychology causes investors to act irrationally and it can be difficult to predict what they will do.
Everyone can make accurate forecasts.
A. 1 and 2.
B. 1 and 3.
C. 2 and 4.
D. 3 and 4.
B. 1 and 3.
Many studies have been conducted to test the three stock market theories. Some evidence supports the theories, whereas other evidence supports capital market inefficiencies. Those inefficiencies may occur for any of the following reasons:
New information is not available to everyone at the same time.
Investors do not react in the same way to the same information.
Not everyone can make accurate forecasts and correct valuation decisions.
Mass investor psychology and greed may at times cause investors to act irrationally.
Select the type of analysis that uses the study of historical stock prices and stock markets with the ultimate goal being the recognition of recurring patterns.
A. Fundamental analysis.
B. Quantitative analysis.
C. Technical analysis.
D. Ratio analysis.
C. Technical analysis.
Technical analysis is the study of historical stock prices and stock price behaviour to identify recurring patterns in the data. Technical analysts study price movements, trading volumes, and data on the number of rising and falling stock issues (among other factors) over time looking for recurring patterns that will allow them to predict future stock price movements.
Nikola has been watching the chart pattern of a stock she is interested in for some time. She has noticed that the stock price has hovered around a support level for several weeks. What investment decision might she make?
A. Buy the stock because the price could start to rise.
B. Sell the stock because its price should start to decline.
C. Short the stock because the stock price should continue to decrease.
D. Buy the stock because the price will remain stable.
A. Buy the stock because the price could start to rise.
A support level might develop after a price decline. Supply and demand forces for the stock are fairly well balanced at this point. Investors start to sense that the stock is bottoming and well-priced. Demand increases for the stock will create upward pressure on the stock price. This is a good time to buy the stock.
Over the last several years, the growth rate of Company XYZ has slowed and is now more in line with the overall rate of economic growth. The company’s profit margins have narrowed and they are depending on the launch of a new product line to improve operating revenue. In what industry stage is XYZ operating?
A. Growth.
B. Declining.
C. Emerging.
D. Mature.
D. Mature.
Industry maturity is characterized by a slowing of growth to a rate that more closely matches the overall rate of economic growth. Profit margins tend to decline, and, as a result, the company may decide to expand into new businesses or product lines with better prospects.
Mary-Theresa has identified a stock pattern showing a head-and-shoulders bottom formation and its price is breaking through the neckline. How will Mary-Theresa interpret this signal?
A. Bearish signal for the stock.
B. Bullish signal for the stock.
C. Hold signal for the stock.
D. Sell signal for the stock.
B. Bullish signal for the stock.
A head-and-shoulders bottom formation forms after a lengthy price decline. The neckline is the resistance line for the formation. If prices break through the neckline, it is a bullish signal and investors should start to buy stocks.
Tuan recognizes a symmetrical triangle formation in the movement of the price of a stock he is interested in. How will Tuan interpret this pattern?
A. It suggests a resistance level has been reached.
B. It suggests a support level has been reached.
C. It suggests buyers are becoming more prevalent than sellers.
D. It suggests a continuation pattern, or pause in the market trend.
D. It suggests a continuation pattern, or pause in the market trend.
In most cases, a symmetrical triangle is just a pause in a bull or bear market trend. The triangle represents a fairly even struggle between buyers and sellers. The buyers move into the stock at the bottom line and the sellers move out of the stock at the top line.
Amir is a trader who makes use of sophisticated computerized strategies to swiftly sell or buy large quantities of equities. What type of strategy is he using?
A. Value trading.
B. Program trading.
C. Growth trading.
D. Efficient market trading.
B. Program trading.
Amir makes use of program trading or high-frequency trading.
Company ABC releases earnings data that contains the surprise announcement that profits will be up sharply by 10% instead of the expected 2%. If you are a believer of the efficient market hypothesis, what effect on the price of ABC shares would you most likely expect to see?
A. No effect.
B. Decrease in price.
C. Increase in price.
D. New resistance level.
C. Increase in price.
The efficient market hypothesis assumes that profit-seeking investors in the marketplace react quickly to the release of new information. As new information about a stock appears, investors reassess the intrinsic value of the stock and adjust their estimation of its price accordingly.
Identify why high levels of government debt can be a problem when the government tries to affect the rate of economic growth.
A. It can impair the government’s ability to reduce taxes or increase spending.
B. It forces the government to borrow internationally, which is much more expensive than borrowing domestically.
C. Governments are restricted with respect to how much debt they can issue, forcing them to turn to issuing equity when they have reached that limit, a more expensive option.
D. It forces the government to use only fiscal policy, making monetary policy unavailable to it.
A. It can impair the government’s ability to reduce taxes or increase spending.
The main problem with a large government debt is that it restricts both fiscal and monetary policy options. Fiscal and monetary decisions affect the overall level of interest rates, the rate of economic growth, and the rate of corporate profit growth. All these factors affect the valuation of stocks. High levels of government and consumer indebtedness impair the government’s ability to reduce taxes or increase spending.
What impact does economic growth have on bonds?
A. Bond yields tend to fall.
B. Bond yields tend to rise.
C. Convertible bond prices tend to rise.
D. All bond prices tend to rise.
B. Bond yields tend to rise.
When economic growth begins to accelerate, bond yields tend to rise. If inflation begins to rise during an expansion, the Bank most often raises short-term interest rates to slow economic growth and contain inflationary pressures. This action may lead to a more moderate economic growth rate or even a growth recession (i.e., a temporary slowdown that does not become a full recession).
Arshpreet has analyzed the economy and believes Canada’s economy may decline or even fall into a recession over the next two years. He has $20,000 to invest and is interested in investing in a defensive security that is sensitive to interest rates. Identify the type of company you would recommend to him.
A. A new company in the software industry.
B. An automobile company.
C. A grocery chain.
D. A chartered bank.
D. A chartered bank.
Defensive industries have a relatively stable return on investor equity and tend to do relatively well during recessions. The term blue-chip denotes shares of top investment-quality companies, which maintain earnings and dividends through good times and bad. This record usually reflects a dominant market position, strong internal financing, and effective management.
Many investors consider shares of the major Canadian banks to be blue-chip industries; however, bank stock prices are typically sensitive to changes in interest rates. As interest rates rise, banks must raise the rate they pay on deposits to attract funds. At the same time, a large part of their revenue is derived from mortgages with fixed interest rates. The result is a profit squeeze. Bank stock prices are particularly sensitive to changes in long bond yields.
Personal tax rates are increased by 10%. What impact will this have on the behaviour of individuals?
A. Spending will be unaffected.
B. Spending will decrease.
C. Savings will increase.
D. Investment in blue-chip equities will increase.
B. Spending will decrease.
By changing tax levels, governments can alter the spending power of individuals and businesses. Higher taxes on corporate profits, generally speaking, reduces the amount businesses can pay out in dividends. The resulting reduction in personal income will leave individuals with less disposable income, which curtails their spending and their savings; similarly, the reduction in dividend payments makes it unlikely that individuals will increase their investment in blue-chip investments.
