Lecture 9

Question 1

Technical Analysis

Answer 1

Set of techniques (Quantitative and qualitative) for deriving forecasts of financial prices exclusively by analysing the history of the particular price and transaction volume. Assumes price developments display regular, recurring patterns

Question 2

Moving Average Rules

Answer 2

Compare MA index to the closing price of day t: If closing price crosses MA_t(q) from below, we buy
(long position) and vice versa

Question 3

Relative Strength Index (RSI)

Answer 3

Designed to indicate that price movements in a particular direction have recently been too rapid and that a correction in the opposite direction is imminent
- Simplest case: Asset overbought if RSI>80 and oversold in RSI <20

Question 4

Transaction Costs

Answer 4

• Contribute significantly on the final profit, especially when the rule triggers a high frequency of trading
• Breakeven point: Amount of transaction cost (in %) making the return vanished

Question 5

Varying Parameters

Answer 5

MA_t(q): x% above it for d days, take long position until closing day prices moves down to at least x% below it and remain for d days, take short position and vice versa

Question 6

Pairs trading

Answer 6

Find two stocks with similar price movements. When they spread apart, short the winner and buy the loser. Eventually they will converge

Question 7

Profitability Debate

Answer 7

Market may be irrational and technical analysis might exploit this.
There’s no economic fundamental support for such profitability.

Question 8

Qualitative Technical Analysis

Answer 8

Technical analysis has survived because of its visual mode of analysis is more conducive to human cognition. Humans also have better pattern recognition than computers

Question 9

Recent Developments

Answer 9

Conventional neural network can find profitable patterns for candle-stick charts

Question 10

Investment Funds

Answer 10

Financial intermediaries that use investor funds to invest in a wide range of securities and other assets

Question 11

Mutual Funds

Answer 11

• Open to all investors
• Public knows portfolio
• Active mutual funds aim to beat the market
• Active managed funds usually have a higher fee
• Studies suggest active equity funds don’t out perform the market. Good performance not persistent, bad performance is. Avoid investing in these by using past performance.

Question 12

Mutual Fund Share Price

Answer 12

• MF shares can only be bought or sold at the end of the day
• Net Asset Value (NAV)= (market value of assets minus liabilities)/ number of shares outstanding

Question 13

Exchange Traded Funds (ETFs)

Answer 13

Offshoots of mutual funds that allow investors to trade index portfolios just as they do shares of stock
- ETFs have grown rapidly

Question 14

Mutual Fund Market Share

Answer 14

Despite growth of ETFs, the mutual funds still dominate the market

Question 15

Hedge Funds

Answer 15

• Investors buy shares in funds, which invest assets on their behalf
• Public don’t know the fund’s portfolio
• Investors invest a minimum $500k
• Hedge funds invest in a wider range of asset than mutual funds. Can use leverage
• Different fee structure, have an incentive fee of 20%
• Generally provide higher returns