Quantitative Methods CFA Level 1

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Technical analysis stands in contrast to... (2)

______ 1. Efficient market hypothesis EMH ("past performance has no influence over future performance"). 2. Fundamental analysis.

What are the underlying assumptions of technical analysis (4)

______ 1. Supply and demand determine market value of goods 2. Rational and irrational factors govern supply and demand, which the market continually and automatically weighs those factors 3. Prices for securities and overall value of market move in trends which persist over a period of time 4. Trends change in reaction to shifts in supply and demand relationships. these shifts can be detected in the action of the market.

Technicians expect a... price adjustment reflecting the...

______ gradual price adjustment reflecting the gradual flow of information

What does US GAAP stand for?

______ GARP = Generally accepted accounting principles, mainly used in US.

What are the problems with accounting statements, according to technicians (3)?
______ 1. Lack of information in accounting statements, e. g. sales information, capital utilized by product line etc. 2. U.S. GAAP/IFRS let accountants choose among different ways of reporting expenses, assets, liabilities which produce vastly different values 3. Psychological and non-quantifiable variables (e. g., political risk, investor attitude) omitted

Fundamental analyst must process new information... and... in order to experience ...
______ quickly and correctly in order to experience ideal timing

Technicians contend they are more likely than a fundamental analyst to experience...
______ ideal timing

Define the weak-form efficient market hypothesis (EMH).

______ Current stock prices fully reflect market information such as past prices and returns

What are the challenges to technical analysis (6)?

______ 1. Statistical analysis has shown that prices do not move in trends, pro EMH 2. Untestability, certain price patterns may never be repeated, making some technical trading rules untestable 3. Price patterns self-fulfilling, potentially 4. Success of a particular trading rule encourages many investors to use it, in effect neutralizing the strategy 5. Subjective judgment used in technical trading, consensus of several signals 6. Standard values may change over time that signal investment decisions

Name the groups of technical analysts (4).

______ 1. Contrarians, contrary-opinion signals 2. "Follow the smart money" 3. Using technical indicators that are not easily classified 4. Using price/volume, including Dow theory

Define contrary-opinion rules in technical analysis (6).

______ 1. "Mutual funds are wrong at peaks and troughs". mutual fund cash positions, liquid asset ratio (cash ratio) high at troughs (11%) and low at peaks (4%). rule: buy at liquid asset ratio approaching 11%, sell at liquid asset ratio approaching 4%. high cash ratio bullish indicator because of potential buying power and vice versa. 2. High credit balances in brokerage accounts seen as bullish signs of purchasing power, low balances bearish sign

3. Investment advisory opinions: 60%/20% ratio of bearish/bullish advisory positions signals approach of a market trough which is a bullish sign - vice versa 4. OTC vs. NYSE volume: speculative trading peaks at market peaks, high ratio is a bearish sign. look for direction of ratio, as it is often changing 5. CBOE put-call ratio: put-call ratio > 0.60 signals bearish attitude for investors, bullish for contrarians, ratio < 0.40 bullish for investors, bearish for contrarians 6. Futures traders bullish on stock-index futures: > 70% of futures traders bullish is a bearish signal for contrarians, < 30% of traders bullish is bullish sign

What are the triggers of the CBOE put-call ratio for bearish signals and for bullish signals?
______ Put-call ratio > 0.60 signals bearish attitude for investors, a bullish signal for contrarians Put-call ratio < 0.40 bullish for investors, bearish for contrarians

Describe the "follow the smart money" rules (3).

______ 1. Confidence index: measures difference in yield spread between high-grade bonds and a large cross section of bonds. when confidence is high, investors will invest in riskier bonds, depressing their yield and the spread and increasing the ratio. high ratio is a bullish indicator. ratio = yieldhigh grade / yieldcross section 2. T-bill-Eurodollar yield spread: spread between T-bill yields and Eurodollar yields. crisis encourages investors to buy safe-haven T-bills, causing the spread to widen and the ratio to decline. trough expected shortly thereafter. ratio = yieldT-bill / yieldEuro$ 3. Debit balances in brokerage accounts (margin debt): increase in margin debt (by sophisticated investors) contended a bullish signal, decrease bearish.

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