Chapter 13: Fundamental and Technical Analysis

Question 1

Method of evaluating capital market conditions, economic conditions, industry conditions, and the condition of individual companies in an attempt to measure intrinsic value of a security

Answer 1

Fundamental Analysis

Question 2

Method of determining the future price direction of a security based on past price movements

Answer 2

Technical Analysis

Question 3

Assumes all past market information is fully reflected in current prices, so technical analysis has little to no value

Answer 3

Weak form of the efficient market hypothesis

Question 4

Assumes that all publicly available information is fully reflected in current prices, meaning technical and fundamental analysis have little to no value

Answer 4

Semi-Strong form of the efficient market hypothesis

Question 5

Assumes all information is fully reflected in current prices, including both publicly available and insider information.

Answer 5

Strong form of the efficient market hypothesis

Question 6

Profit-seeking investors in the marketplace react quickly to the release of information. When new information appears, investors reassess the intrinsic value of the stock and adjust their estimation of the price accordingly

Answer 6

Assumptions of the efficient market hypothesis

Question 7

A stock’s price fully reflects all available information and represents the best estimate of the stock’s true value

Answer 7

Conclusions of the efficient market hypothesis

Question 8

New information concerning a stock is disseminated randomly over time, so price changes are random and bear no relation to previous prices

Answer 8

Assumptions of the random walk theory

Question 9

Past price changes contain no useful information because any developments affecting the company have already been reflected in the current price of the stock

Answer 9

Conclusions of the random walk theory

Question 10

People are rational and have access to all necessary information. People use information intelligently in their own self interests and make intelligent decisions after weighing all information

Answer 10

Assumptions of the rational expectations hypothesis

Question 11

Past mistakes can be avoided by using available information to anticipate change

Answer 11

Conclusions of the rational expectations hypothesis

Question 12

How tax changes, government spending, and government debt impact the supply and demand of securities

Answer 12

The Fiscal Policy Impact

Question 13

How the Bank of Canada promotes Canada’s economic and social welfare, by by attempting to keep the value of the Canadian dollar stable, by keeping inflation low, stable, and predictable

Answer 13

The Monetary Policy Impact

Question 14

Creates widespread uncertainty and undermines confidence in the future, which tend to result in higher interest rates, lower corporate profits, and lower price-earnings multiples. Leads to higher inventory and labour costs for manufacturers, which is usually passed onto consumers in the form of higher prices, that buyers eventually resist

Answer 14

The Impact of Inflation

Question 15

This common classification system is used by investment dealers to define the coverage universe of their equity analysts. One problem with this classification is that some products and services operate in more than one industry

Answer 15

Classifying Industries by Product or Service

Question 16

New industries that are continually developing to provide products and services that meet society’s changing needs and demands.

Answer 16

Emerging Growth Industries

Question 17

Industries in which sales and earnings are consistently expanding at a faster rate than most other industries. Should have an above average rate of earnings on invested capital over several years.

Answer 17

Growth Industries

Question 18

Industries that experience slower, more stable growth in sales and earnings that more closely matches the overall rate of economic growth.

Answer 18

Mature Industries

Question 19

Companies that have moved from the mature stage because they have stopped growing. Produce products for which demand has declined because of changes in technology, an inability to compete on price, or changes in consumer taste.

Answer 19

Declining Industries

Question 20

Companies choose to enter an industry depending on the amount of capital required, opportunities to achieve economies of scale, the existence of established distribution channels, regulatory factors, and product differences.

Answer 20

Threat of New Entry

Question 21

The degree of competition between existing firms. Depends on the number of competitors, their relative strength, the rate of industry growth, and the extent to which the products are unique.

Answer 21

Competitive Rivalry

Question 22

The potential for pressure from substitute products. Other industries may have similar products that compete with the industry’s products.

Answer 22

Threat of Substitutes

Question 23

The extent to which buyers of the product or service can put pressure on the company to lower prices.

Answer 23

Bargaining Powers of Buyers

Question 24

The extent to which suppliers can put pressure on the company to pay more for the resources they supply.

Answer 24

Bargaining Powers of Suppliers

Question 25

Industries where the adverse effects of a downturn in the business cycle will affect them most.

Answer 25

Cyclical Industries

Question 26

Have a relatively stable return on equity and tend to do relatively well during recessions. Usually blue chip, which maintain earnings and dividends through good times and bad and reflects a dominant market position, strong internal financing, and effective management.

Answer 26

Defensive Industries

Question 27

Usually applies to industries in which risk and uncertainty are unusually high because analysts lack definitive information.

Answer 27

Speculative Industries

Question 28

1. All influences on market action are automatically accounted for or discounted in price activity.
2. Prices move in trends, and those trends tend to persist for relatively long periods of time.
3. The future repeats the past.

Answer 28

Assumptions of Technical Analysis

Question 29

The analysis of graphic representations of relevant market data. The most common type graphs the high, low, and close of a particular asset.

Answer 29

Chart Analysis

Question 30

The bottom price of the trading range for the security. It is the price at which most investors sense value and are willing to buy the security, and where demand begins to grow. Most short sellers are unwilling to sell at this price, so supply is low, so prices rise.

Answer 30

Support Levels

Question 31

The top price of the trading average. Most investors are willing to sell, most buyers are unwilling to buy. Supply exceeds demand and prices fall.

Answer 31

Resistance Levels

Question 32

The most frequently observed reversal pattern, observed in chart analysis.

Answer 32

head-and-shoulders formation

Question 33

The line joining the two recovery points in a head-and-shoulders formation, that confirms a reversal pattern.

Answer 33

The Neckline

Question 34

Represents a fairly even struggle between buyers and sellers. The activity repeats itself back and forth until one side proves stronger and the stock price breaks out.

Answer 34

Symmetrical Triangle Formation

Question 35

If the price breaks through the moving average line from below on heavy volume, and if the moving average line itself starts to move higher, it means that the declining trend has reversed.

Answer 35

Buy Signal

Question 36

A device for smoothing out fluctuating values in an individual stock or the aggregate market as a whole. Calculated by adding the closing prices for a stock over a predetermined period and dividing the total by the number of days or weeks in the period selected.

Answer 36

Moving average

Question 37

If the price breaks through the moving average line from above on heavy volume and if the moving average line itself starts to fall, it means that the upward trend has reversed.

Answer 37

Sell signal

Question 38

A measure of investor expectations. Contrarian investors use these indicators to determine what the majority of investors expect prices to do in the future, so that they can move in the opposite direction.

Answer 38

Sentiment Indicators

Question 39

Can help forecast when the market will start moving in a particular direction and when it will ultimately reach its peak or trough.

Answer 39

Cycle Analysis

Question 40

The category of cycle length that is greater than two years.

Answer 40

Long Term

Question 41

The category of cycle length that is one year.

Answer 41

Seasonal

Question 42

The category of cycle length that is 9 - 26 weeks.

Answer 42

Primary / Intermediate

Question 43

The category of cycle length that is four weeks.

Answer 43

Trading