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The Time Value of Money Test ID: 7658669 Question #1 of 87 Question ID: 412807 You borrow $15,000 to buy a car The loan is to be paid off in monthly payments over years at 12% annual interest What is the amount of each payment? ᅞ A) $456 ᅞ B) $546 ᅚ C) $334 Explanation I = 12 / 12 = 1; N = × 12 = 60; PV = 15,000; CPT → PMT = 333.67 Question #2 of 87 Question ID: 412753 Wei Zhang has funds on deposit with Iron Range bank The funds are currently earning 6% interest If he withdraws $15,000 to purchase an automobile, the 6% interest rate can be best thought of as a(n): ᅞ A) discount rate ᅚ B) opportunity cost ᅞ C) financing cost Explanation Since Wei will be foregoing interest on the withdrawn funds, the 6% interest can be best characterized as an opportunity cost the return he could earn by postponing his auto purchase until the future Question #3 of 87 Question ID: 412768 A local bank offers an account that pays 8%, compounded quarterly, for any deposits of $10,000 or more that are left in the account for a period of years The effective annual rate of interest on this account is: ᅚ A) 8.24% ᅞ B) 4.65% ᅞ C) 9.01% Explanation (1 + periodic rate)m − = (1.02)4 − = 8.24% Question #4 of 87 Question ID: 412759 As the number of compounding periods increases, what is the effect on the EAR? EAR: ᅚ A) increases at a decreasing rate ᅞ B) increases at an increasing rate ᅞ C) does not increase Explanation There is an upper limit to the EAR as the frequency of compounding increases In the limit, with continuous compounding the EAR = eAPR -1 Hence, the EAR increases at a decreasing rate Question #5 of 87 Question ID: 412810 An investor deposits $4,000 in an account that pays 7.5%, compounded annually How much will this investment be worth after 12 years? ᅞ A) $5,850 ᅞ B) $9,358 ᅚ C) $9,527 Explanation N = 12; I/Y = 7.5; PV = -4,000; PMT = 0; CPT → FV = $9,527 Question #6 of 87 Question ID: 412802 Consider a 10-year annuity that promises to pay out $10,000 per year; given this is an ordinary annuity and that an investor can earn 10% on her money, the future value of this annuity, at the end of 10 years, would be: ᅚ A) $159,374 ᅞ B) $175,312 ᅞ C) $110.000 Explanation N = 10; I/Y = 10; PMT = -10,000; PV = 0; CPT → FV = $159,374 Question #7 of 87 Question ID: 412814 If 10 equal annual deposits of $1,000 are made into an investment account earning 9% starting today, how much will you have in 20 years? ᅚ A) $39,204 ᅞ B) $42,165 ᅞ C) $35,967 Explanation Switch to BGN mode PMT = -1,000; N = 10, I/Y = 9, PV = 0; CPT → FV = 16,560.29 Remember the answer will be one year after the last payment in annuity due FV problems Now PV10 = 16,560.29; N = 10; I/Y = 9; PMT = 0; CPT → FV = 39,204.23 Switch back to END mode Question #8 of 87 Question ID: 412790 An investor purchases a 10-year, $1,000 par value bond that pays annual coupons of $100 If the market rate of interest is 12%, what is the current market value of the bond? ᅞ A) $1,124 ᅚ B) $887 ᅞ C) $950 Explanation Note that bond problems are just mixed annuity problems You can solve bond problems directly with your financial calculator using all five of the main TVM keys at once For bond-types of problems the bond's price (PV) will be negative, while the coupon payment (PMT) and par value (FV) will be positive N = 10; I/Y = 12; FV = 1,000; PMT = 100; CPT → PV = -886.99 Question #9 of 87 Question ID: 412773 Given: $1,000 investment, compounded monthly at 12% find the future value after one year ᅞ A) $1,121.35 ᅚ B) $1,126.83 ᅞ C) $1,120.00 Explanation Divide the interest rate by the number of compound periods and multiply the number of years by the number of compound periods I = 12 / 12 = 1; N = (1)(12) = 12; PV = 1,000 Question #10 of 87 Question ID: 412785 An investor deposits $10,000 in a bank account paying 5% interest compounded annually Rounded to the nearest dollar, in years the investor will have: ᅞ A) $12,500 ᅚ B) $12,763 ᅞ C) $10,210 Explanation PV = 10,000; I/Y = 5; N = 5; CPT → FV = 12,763 or: 10,000(1.05)5 = 12,763 Question #11 of 87 Question ID: 412809 Given the following cash flow stream: End of Year Annual Cash Flow $4,000 $2,000 -0- -$1,000 Using a 10% discount rate, the present value of this cash flow stream is: ᅚ A) $4,606 ᅞ B) $3,415 ᅞ C) $3,636 Explanation PV(1): N = 1; I/Y = 10; FV = -4,000; PMT = 0; CPT → PV = 3,636 PV(2): N = 2; I/Y = 10; FV = -2,000; PMT = 0; CPT → PV = 1,653 PV(3): PV(4): N = 4; I/Y = 10; FV = 1,000; PMT = 0; CPT → PV = -683 Total PV = 3,636 + 1,653 + − 683 = 4,606 Question #12 of 87 Question ID: 412769 If a $45,000 car loan is financed at 12% over years, what is the monthly car payment? ᅚ A) $1,185 ᅞ B) $985 ᅞ C) $1,565 Explanation N = × 12 = 48; I/Y = 12/12 = 1; PV = -45,000; FV = 0; CPT → PMT = 1,185.02 Question #13 of 87 Question ID: 412786 Find the future value of the following uneven cash flow stream Assume end of the year payments The discount rate is 12% Year -2,000 Year -3,000 Year 6,000 Year 25,000 Year 30,000 ᅞ A) $33,004.15 ᅚ B) $58,164.58 ᅞ C) $65,144.33 Explanation N = 4; I/Y = 12; PMT = 0; PV = -2,000; CPT → FV = -3,147.04 N = 3; I/Y = 12; PMT = 0; PV = -3,000; CPT → FV = -4,214.78 N = 2; I/Y = 12; PMT = 0; PV = 6,000; CPT → FV = 7,526.40 N = 1; I/Y = 12; PMT = 0; PV = 25,000; CPT → FV = 28,000.00 N = 0; I/Y = 12; PMT = 0; PV = 30,000; CPT → FV = 30,000.00 Sum the cash flows: $58,164.58 Alternative calculation solution: -2,000 × 1.124 − 3,000 × 1.123 + 6,000 × 1.122 + 25,000 × 1.12 + 30,000 = $58,164.58 Question #14 of 87 Question ID: 412782 If $10,000 is invested in a mutual fund that returns 12% per year, after 30 years the investment will be worth: ᅞ A) $300,000 ᅞ B) $10,120 ᅚ C) $299,599 Explanation FV = 10,000(1.12)30 = 299,599 Using TI BAII Plus: N = 30; I/Y = 12; PV = -10,000; CPT → FV = 299,599 Question #15 of 87 Question ID: 412811 An annuity will pay eight annual payments of $100, with the first payment to be received one year from now If the interest rate is 12% per year, what is the present value of this annuity? ᅞ A) $1,229.97 ᅞ B) $556.38 ᅚ C) $496.76 Explanation N = 8; I/Y = 12%; PMT = -$100; FV = 0; CPT → PV = $496.76 Question #16 of 87 Question ID: 412794 Assuming a discount rate of 10%, which stream of annual payments has the highest present value? ᅞ A) $20 ᅞ B) -$100 ᅚ C) $110 -$5 $20 -$100 -$100 $20 $10 $110 $500 $5 Explanation This is an intuition question The two cash flow streams that contain the $110 payment have the same total cash flow but the correct answer is the one where the $110 occurs earlier The cash flow stream that has the $500 that occurs four years hence is overwhelmed by the large negative flows that precede it Question #17 of 87 Question ID: 412756 The real risk-free rate can be thought of as: ᅞ A) approximately the nominal risk-free rate plus the expected inflation rate ᅚ B) approximately the nominal risk-free rate reduced by the expected inflation rate ᅞ C) exactly the nominal risk-free rate reduced by the expected inflation rate Explanation The approximate relationship between nominal rates, real rates and expected inflation rates can be written as: Nominal risk-free rate = real risk-free rate + expected inflation rate Therefore we can rewrite this equation in terms of the real risk-free rate as: Real risk-free rate = Nominal risk-free rate - expected inflation rate The exact relation is: (1 + real)(1 + expected inflation) = (1 + nominal) Question #18 of 87 Question ID: 412828 An investor who requires an annual return of 12% has the choice of receiving one of the following: A 10 annual payments of $1,225.00 to begin at the end of one year B 10 annual payments of $1,097.96 beginning immediately Which option has the highest present value (PV) and approximately how much greater is it than the other option? ᅞ A) Option B's PV is $114 greater than option A's ᅚ B) Option B's PV is $27 greater than option A's ᅞ C) Option A's PV is $42 greater than option B's Explanation Option A: N = 10, PMT = -$1,225, I = 12%, FV = 0, Compute PV = $6,921.52 Option B: N = 9, PMT = -$1,097.96, I = 12%, FV = 0, Compute PV → $5,850.51 + 1,097.96 = 6,948.17 or put calculator in Begin mode N = 10, PMT = $1,097.96, I = 12%, FV = 0, Compute PV → $6,948.17 Difference between the options = $6,921.52 − $6,948.17 = -$26.65 Option B's PV is approximately $27 higher than option A's PV Question #19 of 87 Question ID: 412778 A local bank offers a certificate of deposit (CD) that earns 5.0% compounded quarterly for three and one half years If a depositor places $5,000 on deposit, what will be the value of the account at maturity? ᅞ A) $5,931.06 ᅚ B) $5,949.77 ᅞ C) $5,875.00 Explanation The value of the account at maturity will be: $5,000 × (1 + 0.05 / 4)(3.5 × 4) = $5.949.77; or with a financial calculator: N = years × quarters/year + = 14 periods; I = 5% / quarters/year = 1.25; PV = $5,000; PMT = 0; CPT → FV = $5,949.77 Question #20 of 87 Question ID: 412803 Justin Banks just won the lottery and is trying to decide between the annual cash flow payment option or the lump sum option He can earn 8% at the bank and the annual cash flow option is $100,000/year, beginning today for 15 years What is the annual cash flow option worth to Banks today? ᅞ A) $855,947.87 ᅚ B) $924,423.70 ᅞ C) $1,080,000.00 Explanation First put your calculator in the BGN N = 15; I/Y = 8; PMT = 100,000; CPT → PV = 924,423.70 Alternatively, not set your calculator to BGN, simply multiply the ordinary annuity (end of the period payments) answer by + I/Y You get the annuity due answer and you don't run the risk of forgetting to reset your calculator back to the end of the period setting OR N = 14; I/Y = 8; PMT = 100,000; CPT → PV = 824,423.70 + 100,000 = 924,423.70 Question #21 of 87 Question ID: 412793 The following stream of cash flows will occur at the end of the next five years Yr -2,000 Yr -3,000 Yr 6,000 Yr 25,000 Yr 30,000 At a discount rate of 12%, the present value of this cash flow stream is closest to: ᅚ A) $33,004 ᅞ B) $58,165 ᅞ C) $36,965 Explanation N = 1; I/Y = 12; PMT = 0; FV = -2,000; CPT → PV = -1,785.71 N = 2; I/Y = 12; PMT = 0; FV = -3,000; CPT → PV = -2,391.58 N = 3; I/Y = 12; PMT = 0; FV = 6,000; CPT → PV = 4,270.68 N = 4; I/Y = 12; PMT = 0; FV = 25,000; CPT → PV = 15,887.95 N = 5; I/Y = 12; PMT = 0; FV = 30,000; CPT → PV = 17,022.81 Sum the cash flows: $33,004.15 Note: If you want to use your calculator's NPV function to solve this problem, you need to enter zero as the initial cash flow (CF 0) If you enter -2,000 as CF 0, all your cash flows will be one period too soon and you will get one of the wrong answers Question #22 of 87 Question ID: 485754 Paul Kohler inherits $50,000 and deposits it immediately in a bank account that pays 6% interest No other deposits or withdrawals are made In two years, what will be the account balance assuming monthly compounding? ᅞ A) $53,100 ᅞ B) $50,500 ᅚ C) $56,400 Explanation To compound monthly, remember to divide the interest rate by 12 (6%/12 = 0.50%) and the number of periods will be years times 12 months (2 × 12 = 24 periods) The value after 24 periods is $50,000 × 1.00524 = $56,357.99 The problem can also be solved using the time value of money functions: N = 24; I/Y = 0.5; PMT = 0; PV = 50,000; CPT FV = $56,357.99 Question #23 of 87 Question ID: 412812 An annuity will pay eight annual payments of $100, with the first payment to be received three years from now If the interest rate is 12% per year, what is the present value of this annuity? The present value of: ᅚ A) a lump sum discounted for years, where the lump sum is the present value of an ordinary annuity of periods at 12% ᅞ B) a lump sum discounted for years, where the lump sum is the present value of an ordinary annuity of periods at 12% ᅞ C) an ordinary annuity of periods at 12% Explanation The PV of an ordinary annuity (calculation END mode) gives the value of the payments one period before the first payment, which is a time = value here To get a time = value, this value must be discounted for two periods (years) Question #24 of 87 Question ID: 412787 What is the maximum an investor should be willing to pay for an annuity that will pay out $10,000 at the beginning of each of the next 10 years, given the investor wants to earn 12.5%, compounded annually? ᅚ A) $62,285 ᅞ B) $52,285 ᅞ C) $55,364 Explanation Using END mode, the PV of this annuity due is $10,000 plus the present value of a 9-year ordinary annuity: N=9; I/Y=12.5; PMT=-10,000; FV=0; CPT PV=$52,285; $52,285 + $10,000 = $62,285 Or set your calculator to BGN mode then N=10; I/Y=12.5; PMT=-10,000; FV=0; CPT PV= $62,285 Question #25 of 87 Question ID: 412799 What is the present value of a 10-year, $100 annual annuity due if interest rates are 0%? ᅞ A) No solution ᅚ B) $1,000 ᅞ C) $900 Explanation When I/Y = you just sum up the numbers since there is no interest earned Question #26 of 87 Question ID: 412792 If $2,000 a year is invested at the end of each of the next 45 years in a retirement account yielding 8.5%, how much will an investor have at retirement 45 years from today? ᅞ A) $100,135 ᅚ B) $901,060 ᅞ C) $90,106 Explanation N = 45; PMT = -2,000; PV = 0; I/Y = 8.5%; CPT → FV = $901,060.79 Question #27 of 87 Question ID: 412755 Vega research has been conducting investor polls for Third State Bank They have found the most investors are not willing to tie up their money in a 1-year (2-year) CD unless they receive at least 1.0% (1.5%) more than they would on an ordinary savings account If the savings account rate is 3%, and the bank wants to raise funds with 2-year CDs, the yield must be at least: ᅚ A) 4.5%, and this represents a required rate of return ᅞ B) 4.0%, and this represents a required rate of return ᅞ C) 4.5%, and this represents a discount rate Explanation Since we are taking the view of the minimum amount required to induce investors to lend funds to the bank, this is best described as a required rate of return Based upon the numerical information, the rate must be 4.5% (= 3.0 + 1.5) Question #28 of 87 Question ID: 412754 Selmer Jones has just inherited some money and wants to set some of it aside for a vacation in Hawaii one year from today His bank will pay him 5% interest on any funds he deposits In order to determine how much of the money must be set aside and held for the trip, he should use the 5% as a: ᅚ A) discount rate ᅞ B) required rate of return ᅞ C) opportunity cost Explanation He needs to figure out how much the trip will cost in one year, and use the 5% as a discount rate to convert the future cost to a present value Thus, in this context the rate is best viewed as a discount rate Question #29 of 87 Question ID: 412770 Jamie Morgan needs to accumulate $2,000 in 18 months If she can earn 6% at the bank, compounded quarterly, how much must she deposit today? ᅚ A) $1,829.08 ᅚ B) The analyst should fail to reject the null hypothesis and conclude that the earnings estimates are not significantly different from reported earnings ᅞ C) To test the null hypothesis, the analyst must determine the exact sample size and calculate the degrees of freedom for the test Explanation The null hypothesis is that earnings estimates are equal to reported earnings To reject the null hypothesis, the calculated test statistic must fall outside the two critical values IF the analyst tests the null hypothesis with a z-statistic, the crtical values at a 5% confidence level are ±1.96 Because the calculated test statistic, 1.25, lies between the two critical values, the analyst should fail to reject the null hypothesis and conclude that earnings estimates are not significantly different from reported earnings If the analyst uses a t-statistic, the upper critical value will be even greater than 1.96, never less, so even without the exact degrees of freedom the analyst knows any t-test would fail to reject the null Question #76 of 88 Question ID: 413369 Kyra Mosby, M.D., has a patient who is complaining of severe abdominal pain Based on an examination and the results from laboratory tests, Mosby states the following diagnosis hypothesis: Ho: Appendicitis, HA : Not Appendicitis Dr Mosby removes the patient's appendix and the patient still complains of pain Subsequent tests show that the gall bladder was causing the problem By taking out the patient's appendix, Dr Mosby: ᅚ A) made a Type II error ᅞ B) is correct ᅞ C) made a Type I error Explanation This statement is an example of a Type II error, which occurs when you fail to reject a hypothesis when it is actually false (also known as the power of the test) The other statements are incorrect A Type I error is the rejection of a hypothesis when it is actually true (also known as the significance level of the test) Question #77 of 88 Question ID: 413323 Robert Patterson, an options trader, believes that the return on options trading is higher on Mondays than on other days In order to test his theory, he formulates a null hypothesis Which of the following would be an appropriate null hypothesis? Returns on Mondays are: ᅚ A) not greater than returns on other days ᅞ B) greater than returns on other days ᅞ C) less than returns on other days Explanation An appropriate null hypothesis is one that the researcher wants to reject If Patterson believes that the returns on Mondays are greater than on other days, he would like to reject the hypothesis that the opposite is true-that returns on Mondays are not greater than returns on other days Question #78 of 88 Question ID: 413344 Which of the following is the correct sequence of events for testing a hypothesis? ᅞ A) State the hypothesis, formulate the decision rule, select the level of significance, compute the test statistic, and make a decision ᅞ B) State the hypothesis, select the level of significance, compute the test statistic, formulate the decision rule, and make a decision ᅚ C) State the hypothesis, select the level of significance, formulate the decision rule, compute the test statistic, and make a decision Explanation Depending upon the author there can be as many as seven steps in hypothesis testing which are: Stating the hypotheses Identifying the test statistic and its probability distribution Specifying the significance level Stating the decision rule Collecting the data and performing the calculations Making the statistical decision Making the economic or investment decision Question #79 of 88 Question ID: 434223 A Type II error: ᅚ A) fails to reject a false null hypothesis ᅞ B) rejects a true null hypothesis ᅞ C) fails to reject a true null hypothesis Explanation A Type II error is defined as accepting the null hypothesis when it is actually false The chance of making a Type II error is called beta risk Question #80 of 88 Question ID: 413385 An analyst is testing the hypothesis that the mean excess return from a trading strategy is less than or equal to zero The analyst reports that this hypothesis test produces a p-value of 0.034 This result most likely suggests that the: ᅞ A) smallest significance level at which the null hypothesis can be rejected is 6.8% ᅞ B) best estimate of the mean excess return produced by the strategy is 3.4% ᅚ C) null hypothesis can be rejected at the 5% significance level Explanation A p-value of 0.035 means the hypothesis can be rejected at a significance level of 3.5% or higher Thus, the hypothesis can be rejected at the 10% or 5% significance level, but cannot be rejected at the 1% significance level Question #81 of 88 Question ID: 413395 In order to test if the mean IQ of employees in an organization is greater than 100, a sample of 30 employees is taken The sample value of the computed z-statistic = 3.4 The appropriate decision at a 5% significance level is to: ᅚ A) reject the null hypotheses and conclude that the population mean is greater than 100 ᅞ B) reject the null hypothesis and conclude that the population mean is equal to 100 ᅞ C) reject the null hypothesis and conclude that the population mean is not equal to 100 Explanation Ho:μ ≤ 100; Ha: μ > 100 Reject the null since z = 3.4 > 1.65 (critical value) Question #82 of 88 Question ID: 413362 Which of the following statements regarding hypothesis testing is least accurate? ᅚ A) A type I error is acceptance of a hypothesis that is actually false ᅞ B) A type II error is the acceptance of a hypothesis that is actually false ᅞ C) The significance level is the risk of making a type I error Explanation A type I error is the rejection of a hypothesis that is actually true Question #83 of 88 Question ID: 413382 Of the following explanations, which is least likely to be a valid explanation for divergence between statistical significance and economic significance? ᅞ A) Adjustment for risk ᅞ B) Transactions costs ᅚ C) Data errors Explanation While data errors would certainly come to bear on the analysis, in their presence we would not be able to assert either statistical or economic significance In other words, data errors are not a valid explanation The others are all mitigating factors that can cause statistically significant results to be less than economically significant Question #84 of 88 Question ID: 413380 Given a mean of 10% and a standard deviation of 14%, what is a 95% confidence interval for the return next year? ᅚ A) -17.44% to 37.44% ᅞ B) -4.00% to 24.00% ᅞ C) -17.00% to 38.00% Explanation 10% +/- 14(1.96) = -17.44% to 37.44% Question #85 of 88 Question ID: 413392 In a test of the mean of a population, if the population variance is: ᅞ A) known, a t-distributed test statistic is appropriate ᅚ B) known, a z-distributed test statistic is appropriate ᅞ C) unknown, a z-distributed test statistic is appropriate Explanation If the population sampled has a known variance, the z-test is the correct test to use In general, a t-test is used to test the mean of a population when the population variance is unknown Note that in special cases when the sample is extremely large, the z-test may be used in place of the t-test, but the t-test is considered to be the test of choice when the population variance is unknown Question #86 of 88 Question ID: 413406 The variance of 100 daily stock returns for Stock A is 0.0078 The variance of 90 daily stock returns for Stock B is 0.0083 Using a 5% level of significance, the critical value for this test is 1.61 The most appropriate conclusion regarding whether the variance of Stock A is different from the variance of Stock B is that the: ᅚ A) variances are equal ᅞ B) variances are not equal ᅞ C) variance of Stock B is significantly greater than the variance of Stock A Explanation A test of the equality of variances requires an F-statistic The calculated F-statistic is 0.0083/0.0078 = 1.064 Since the calculated F value of 1.064 is less than the critical F value of 1.61, we cannot reject the null hypothesis that the variances of the stocks are equal Question #87 of 88 Question ID: 448954 Which of the following is an accurate formulation of null and alternative hypotheses? ᅞ A) Greater than for the null and less than or equal to for the alternative ᅞ B) Less than for the null and greater than for the alternative ᅚ C) Equal to for the null and not equal to for the alternative Explanation A correctly formulated set of hypotheses will have the "equal to" condition in the null hypothesis Question #88 of 88 Question ID: 413352 If the probability of a Type I error decreases, then the probability of: ᅚ A) a Type II error increases ᅞ B) incorrectly rejecting the null increases ᅞ C) incorrectly accepting the null decreases Explanation If P(Type I error) decreases, then P(Type II error) increases A null hypothesis is never accepted We can only fail to reject the null Technical Analysis Test ID: 7658803 Question #1 of 32 Question ID: 413430 A value of 0.8 in the short-term Trading Index (TRIN) most likely indicates that: ᅚ A) trading volume is heavier in advancing issues than in declining issues ᅞ B) more investors expect price decreases than increases in the short term ᅞ C) the market is overbought Explanation The TRIN or Arms index is a flow of funds indicator Values less than one indicate more trading volume in advancing stocks than in declining stocks, while values greater than one mean more volume is in declining stocks than in advancing stocks Question #2 of 32 Question ID: 413439 An Elliott wave theorist who forecasts prices based on Fibonacci ratios is most likely to predict that a corrective wave will be: ᅚ A) five-eighths the size of the impulse wave ᅞ B) four-ninths the size of the impulse wave ᅞ C) six-elevenths the size of the impulse wave Explanation The sequence of Fibonacci numbers is 0, 1, 1, 2, 3, 5, 8, 13 Five-eighths is a Fibonacci ratio Question #3 of 32 Question ID: 413423 A support level is the price range at which a technical analyst would expect the: ᅞ A) supply of a stock to decrease substantially ᅞ B) demand for a stock to decrease substantially ᅚ C) demand for a stock to increase substantially Explanation Support and resistance levels Most stock prices remain relatively stable and fluctuate up and down from their true value The lower limit to these fluctuations is called a support level - the price range where a stock appears cheap and attracts buyers The upper limit is called a resistance level - the price range where a stock appears expensive and initiates selling Generally, a support level will develop after a stock has experienced a steady decline from a higher price level Technicians believe that, at some price below the recent peak, other investors will buy who did not buy prior to the first price increase and have been waiting for a small reversal to get into the stock When the price reaches this support price, demand surges and price and volume begin to increase again Question #4 of 32 Question ID: 413414 One of the underlying assumptions of technical analysis is that supply and demand is driven by: ᅚ A) both rational and irrational behavior ᅞ B) rational behavior during calm markets and irrational behavior during volatile markets ᅞ C) rational behavior only Explanation Successful technical analysis assumes both rational and irrational behavior during all market conditions Question #5 of 32 Question ID: 413421 The resistance level signifies the price at which a stock's supply would be expected to: ᅞ A) decrease substantially ᅚ B) increase substantially ᅞ C) cause the stock price to "break out" Explanation Support and resistance levels Most stock prices remain relatively stable and fluctuate up and down from their true value The lower limit to these fluctuations is called a support level - the price range where a stock appears cheap and attracts buyers The upper limit is called a resistance level - the price range where a stock appears expensive and initiates selling Generally, a resistance level tends to develop after a stock has experienced a steady decline from a higher price level Technicians believe that the decline in price will cause some investors who acquired the stock at a higher price to look for an opportunity to sell it near their break-even points Therefore, the supply of stock owned by investors is overhanging the market When the price rebounds to the target price set by these investors, this overhanging supply of stock comes to the market and dramatically reverses the price increase on heavy volume Question #6 of 32 Question ID: 413417 Point and figure charts are most likely to illustrate: ᅞ A) significant increases or decreases in volume ᅚ B) changes of direction in price trends ᅞ C) the length of time over which trends persist Explanation A point-and-figure chart includes only significant price changes, regardless of their timing or volume The technician determines what price interval to record as significiant (the box size) and when to note changes of direction in prices (the reversal size) Point and figure charts not show volume and are not scaled to even time periods Question #7 of 32 Question ID: 413438 Elliott wave theory describes the typical pattern of price movements as: ᅞ A) five waves with the direction of the trend, followed by four waves against the direction of the trend ᅚ B) five waves with the direction of the trend, followed by three waves against the direction of the trend ᅞ C) four waves with the direction of the trend, followed by three waves against the direction of the trend Explanation According to Elliott wave theory, prices tend to move in five waves with the direction of the trend and three waves against the direction of the trend Question #8 of 32 Question ID: 413432 Which of the following would a technical analyst most likely interpret as a "sell" signal? ᅚ A) %K line crosses below the %D line ᅞ B) Rate of change oscillator begins decreasing ᅞ C) Signal line crosses below the MACD line Explanation The %K and %D lines refer to stochastic oscillators The %K line is calculated based on the highest and lowest prices reached in a selected number of days, and the %D line is a moving average of the %K line Used as trading signals, crossovers of the %K line above the %D line are buy signals and crossovers below the %D line are sell signals With a moving average convergence/divergence oscillator, a sell signal is indicated when the MACD line crosses below the signal line, which is a moving average of the MACD line If a rate of change oscillator is used to generate signals, these would typically be indicated when the oscillator crosses above or below the level around which it fluctuates (either or 100) Question #9 of 32 Which of the following is least likely an underlying assumption of technical analysis? ᅚ A) Markets are efficient and all known information is reflected in prices ᅞ B) Supply and demand for a stock is driven by rational and irrational behavior ᅞ C) Prices are determined by supply and demand Explanation For technical analysis to succeed, markets must have some inefficiency in order for trends to develop Question ID: 413411 Question #10 of 32 Question ID: 413413 One of the assumptions of technical analysis is: ᅞ A) all analysts have all current information ᅞ B) the market is efficient ᅚ C) supply and demand are driven by rational and irrational behavior Explanation The market is driven by rational and irrational behavior Question #11 of 32 Question ID: 413441 When technical analysts say a stock has good "relative strength," they mean the: ᅚ A) ratio of the price of the stock to a market index has trended upward ᅞ B) stock has performed well compared to other stocks in the same risk category as measured by beta ᅞ C) recent trading volume in the stock has exceeded the normal trading volume Explanation This is the definition of relative strength When the ratio of the stock price to the market price increases over time, the stock is outperforming the market Question #12 of 32 Question ID: 413427 A trend is most likely to continue if the price chart displays a(n): ᅚ A) ascending triangle pattern ᅞ B) inverse head and shoulders pattern ᅞ C) double top Explanation Triangles are considered to be continuation patterns An inverse head and shoulders pattern would most likely indicate the reversal of a downtrend, while a double top would most likely indicate the reversal of an uptrend Question #13 of 32 Bollinger bands are drawn based on the: ᅞ A) difference between two smoothed moving averages ᅚ B) standard deviation of recent price changes ᅞ C) high and low prices in a recent period Question ID: 413431 Explanation To use Bollinger bands, an analyst will calculate the standard deviation of prices over some number of trading days, and typically will draw the bands two standard deviations above and below a moving average for the same number of days Question #14 of 32 Question ID: 413436 A technical analyst who identifies a decennial pattern and a Kondratieff wave most likely: ᅞ A) is analyzing a daily or intraday price chart ᅞ B) associates these phenomena with U.S presidential elections ᅚ C) believes market prices move in cycles Explanation The decennial pattern and the Kondratieff wave are cycles of ten and 54 years, respectively A technical analyst would be most likely to use these cycles to interpret long-term charts of monthly or annual data Presidential elections in the United States are a possible explanation for a four-year cycle Question #15 of 32 Question ID: 413424 After trending upward for several weeks, the price of Vibex, Inc stock reaches a high of $54 before falling to $48 over the following week The stock then rallies to $57 but then declines again to $48 The following week, the stock increases to $52 on light volume before ending the week at $46 A technical analyst observing this pattern would be most likely to predict that Vibex stock will: ᅞ A) increase to $50 ᅞ B) decrease to $37 ᅚ C) decrease to $39 Explanation The pattern described here is a head and shoulders top with the head at $57 and the neckline at $48 The size of the pattern is $57 − $48 = $9 The price target for the ensuing downtrend equals the size of the head and shoulders pattern and is measured from the neckline: $48 − $9 = $39 Question #16 of 32 A technical analyst believes stock prices are primarily driven by: ᅚ A) market supply and demand forces ᅞ B) specialist trading ᅞ C) the random walk hypothesis Explanation Question ID: 413412 Other assumptions of technical analysis include: Supply and demand is driven by both rational and irrational behavior, security prices move in trends that persist for long periods of time, and while the cause for changes in supply and demand are difficult to determine, the actual shifts in supply and demand can be observed in market price behavior Question #17 of 32 Question ID: 413433 Which of the following would a technical analyst most likely interpret as a "buy" signal? ᅚ A) 10-day moving average crosses above a 60-day moving average ᅞ B) 30-day moving average crosses above a 5-day moving average ᅞ C) 20-day moving average crosses below a 100-day moving average Explanation When using moving averages to generate trading signals, a "golden cross" of a shorter-term average above a longer-term average is a buy signal, while a "dead cross" under the longer-term average is a sell signal Question #18 of 32 Question ID: 413435 Technical analysts who use cycles define a Kondratieff wave as a cycle of: ᅞ A) 18 years ᅞ B) 10 years ᅚ C) 54 years Explanation The Kondratieff wave is a 54-year cycle that some technical analysts believe exists for equity market prices Question #19 of 32 Question ID: 413419 Which of the following technical analysis observations most likely represents a change in polarity? ᅞ A) Bars on a candlestick chart change from empty to filled ᅚ B) A resistance level on a line chart is breached and later acts as a support level ᅞ C) Following an "X" column, a point-and-figure chart begins a new "O" column Explanation "Change in polarity" refers to a perceived tendency for breached support levels to become resistance levels and breached resistance levels to become support levels Question #20 of 32 Question ID: 413410 The advantages of using technical analysis include: ᅞ A) complete objectivity ᅚ B) the incorporation of psychological reasons behind price changes ᅞ C) ease in interpreting reasons behind stock price trends Explanation Technical analysis avoids having to use fundamental data and adjusting for accounting problems, incorporates psychological as well as economic reasons behind price changes, and tells WHEN to buy; not WHY investors are buying Drawbacks include subjective interpretation of charts and graphs Question #21 of 32 Question ID: 413416 Constructing a candlestick chart requires data on: ᅚ A) opening, high, low, and closing prices only ᅞ B) opening, high, low, and closing prices, and trading volume ᅞ C) high, low, and closing prices only Explanation Candlestick charts require the open, high, low, and close for each trading period Question #22 of 32 Question ID: 413415 A technical analysis chart that illustrates only the closing prices of a security on each trading day is best described as a: ᅚ A) line chart ᅞ B) bar chart ᅞ C) point and figure chart Explanation Line charts are composed of closing prices for each trading day connected by lines Bar charts require high and low prices for each trading day Point and figure charts not necessarily show each trading day's closing price Question #23 of 32 Technical analysts who employ Elliott Wave Theory are most likely to use Fibonacci numbers to forecast the: ᅞ A) number of subwaves within a larger wave ᅚ B) sizes of waves ᅞ C) timing of wave direction changes Explanation Question ID: 413437 In Elliott Wave Theory, the sizes of waves are believed to correspond to ratios of Fibonacci numbers Technical analysts who employ this theory may use Fibonacci ratios to estimate price targets Question #24 of 32 Question ID: 413440 The most appropriate tool to use for intermarket analysis of two different asset classes is a: ᅞ A) moving average convergence/divergence chart ᅚ B) relative strength chart ᅞ C) stochastic oscillator Explanation Relative strength charts are useful for intermarket analysis because they illustrate the performance of one asset, sector, or index relative to another Momentum indicators, such as stochastic oscillators and MACD oscillators, are generally used to analyze individual markets Question #25 of 32 Question ID: 413425 A head and shoulders pattern is most likely to precede a reversal in trend if: ᅞ A) volume decreases between the left shoulder and the head, then increases between the head and the right shoulder ᅞ B) the left shoulder, the head, and the right shoulder occur on increasing volume ᅚ C) the left shoulder, the head, and the right shoulder occur on decreasing volume Explanation Decreasing volume on each of the high prices in a head and shoulders pattern (or each of the low prices in an inverse head and shoulders) suggests weakening in the supply and demand forces that were driving the price trend Question #26 of 32 Question ID: 413426 An inverse head and shoulders pattern most likely indicates: ᅞ A) the reversal of an uptrend ᅞ B) the continuation of a downtrend ᅚ C) the reversal of a downtrend Explanation Inverse head and shoulders patterns typically occur after downtrends and indicate that the trend is going to reverse Question #27 of 32 Question ID: 413420 The trend line for a stock in an uptrend is constructed by drawing a straight line through the: ᅚ A) lows ᅞ B) highs ᅞ C) periodic averages Explanation Trendlines connect the increasing low points on a price chart in an uptrend and the decreasing high points in a downtrend Question #28 of 32 Question ID: 413418 When a relative strength ratio (stock price over market price) is increasing, the stock is: ᅞ A) underperforming the index ᅞ B) tracking the index ᅚ C) outperforming the index Explanation Relative strength: When prices of an individual stock or industry change, it is difficult to tell if the change is stock specific or caused by market movements If two variables are changing at the same rate, the ratio created by dividing one of the variables by the other will remain constant This is called the relative strength ratio Relative Strength = Stock Price / Market Price If the ratio increases over time the stock is out-performing the market (a + trend) If the ratio declines over time the stock is under-performing the market (a - trend) Question #29 of 32 Question ID: 484168 The point where technicians expect a substantial increase in the demand for a stock to occur is called a: ᅞ A) break-out point ᅞ B) resistance level ᅚ C) support level Explanation Support and resistance levels Most stock prices remain relatively stable and fluctuate up and down from their true value The lower limit to these fluctuations is called a support level - the price range where a stock appears cheap and attracts buyers The upper limit is called a resistance level - the price range where a stock appears expensive and initiates selling A breakout occurs when the price breaches a support or resistance level and thus may indicate either an increase or a decrease in demand for a stock Question #30 of 32 Question ID: 413434 A technical analyst examining the past 12 months of daily price data for evidence of cycles is most likely to identify: ᅞ A) Kondratieff waves ᅞ B) decennial patterns ᅚ C) impulse waves Explanation Impulse and corrective waves in Elliott wave theory vary in length and can be as short as a few minutes Decennial patterns refer to ten-year cycles The Kondratieff wave refers to a 54-year cycle Question #31 of 32 Question ID: 413429 Closing prices for a commodity were 21.4 on Monday, 22.2 on Tuesday, 21.8 on Wednesday, 22.4 on Thursday, and 23.2 on Friday The five-day standard deviation is 0.7 and the 30-day standard deviation is 1.0 On Friday, five-day Bollinger bands using two standard deviations are closest to: ᅞ A) 24.2 and 20.2 ᅞ B) 24.6 and 21.8 ᅚ C) 23.6 and 20.8 Explanation Bollinger bands are drawn a chosen number of standard deviations above and below a moving average, where the moving average and the standard deviation are calculated using the same number of periods The 5-day moving average is (21.4 + 22.2 + 21.8 + 22.4 + 23.2) / = 22.2 Using two 5-day standard deviations, the upper band on Friday is 22.2 + 2(0.7) = 23.6 and the lower band is 22.2 − 2(0.7) = 20.8 Question #32 of 32 Question ID: 413428 A trend is most likely to reverse if the price chart displays a: ᅚ A) head and shoulders pattern ᅞ B) rectangle pattern ᅞ C) descending triangle pattern Explanation Head and shoulders (and inverse head and shoulders) patterns typically indicate a reversal of a price trend Triangle and rectangle patterns typically suggest the price trend will continue in the same direction ... 4)4 - = 12.55% Question #78 of 87 Question ID: 412764 Peter Wallace wants to deposit $10,000 in a bank certificate of deposit (CD) Wallace is considering the following banks: Bank A offers 5.85%... C, 5.87% ᅚ B) Bank B, 5.90% ᅞ C) Bank A, 5.85% Explanation Effective interest rates: Bank A = 5.85 (already annual compounding) Bank B, nominal = 5.75; C/Y = 12; effective = 5.90 Bank C, nominal... annually Bank B offers 5.75% annual interest rate compounded monthly Bank C offers 5.70% annual interest compounded daily Which bank offers the highest effective interest rate and how much? ᅞ A) Bank