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Chapter 2: Q22I (page 285)

Question: Table 9.4 contains data on market advances and declines. Calculate cumulative breadth and decide whether this technical signal is bullish or bearish.

Table 9.4

Market Advances and Decline

Day

Advances

Decline

1

906

704

2

653

986

3

721

789

4

503

968

5

497

1095

6

970

702

7

1002

609

8

903

722

9

850

748

10

766

766

Short Answer

Expert verified

Answer

The signal is bearish as cumulative breadth is negative but the subsequent decline in magnitude is also indicative of improvement.

Step by step solution

01

Calculation of Net Advances

Table 9.4

Market Advances and Decline

Day

Advances (A)

Decline (D)

Net Advances (A-D)

1

906

704

202

2

653

986

-333

3

721

789

-68

4

503

968

-465

5

497

1095

-598

6

970

702

268

7

1002

609

393

8

903

722

181

9

850

748

102

10

766

766

0

02

 Step 2: Calculation of Cumulative breadth and associated explanation

Table 9.4

Market Advances and Decline

Day

Advances (A)

Decline (D)

Net Advances (A-D)

Cumulative Breadth (Net Advances + Breadth Line value of previous day)

1

906

704

202

202

2

653

986

-333

-131

3

721

789

-68

-199

4

503

968

-465

-664

5

497

1095

-598

-1262

6

970

702

268

-994

7

1002

609

393

-601

8

903

722

181

-420

9

850

748

102

-318

10

766

766

0

-318

The signal is bearish as cumulative breadth is negative. This however also can be noted that the negative number is declining in magnitude and is indicative of improvement. From this it can be drawn that the worst of the bear market is over.

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Most popular questions from this chapter

Suppose that as the economy moves through a business cycle, risk premiums also change. For example, in a recession when people are concerned about their jobs, risk tolerance might be lower and risk premiums might be higher. In a booming economy, tolerance for risk might be higher and risk premiums lower.

a. Would a predictably shifting risk premium such as described here be a violation of the efficient market hypothesis?

b. How might a cycle of increasing and decreasing risk premiums create an appearance that stock prices “overreact,” first falling excessively and then seeming to recover?

Question: Don Sampson begins a meeting with his financial adviser by outlining his investment philosophy as shown below:

Statement Number

Statement

1

Investments should offer strong return potential but with very limited risk. I prefer to be conservative and to minimize losses, even if I miss out on substantial growth opportunities.

2

All nongovernmental investments should be in industry-leading and financially strong companies.

3

Income needs should be met entirely through interest income and cash dividends. All equity securities held should pay cash dividends.

4

Investment decisions should be based primarily on consensus forecasts of general economic conditions and company-specific growth.

5

If an investment falls below the purchase price, that security should be retained until it returns to its original cost. Conversely, I prefer to take quick profits on successful investments.

6

I will direct the purchase of investments, including derivative securities, periodically. These aggressive investments result from personal research and may not prove consistent with my investment policy.

I have not kept records on the performance of similar past investments, but I have had some “big winners.”

Select the statement from the table above that best illustrates each of the following behavioral finance concepts. Justify your selection.

i. Mental accounting.

ii. Overconfidence (illusion of control).

iii. Reference dependence (framing).

Growth and value can be defined in several ways. Growth usually conveys the idea of a portfolio emphasizing or including only companies believed to possess above-average future rates of per-share earnings growth. Low current yield, high price-to-book ratios, and high price-to-earnings ratios are typical characteristics of such portfolios. Value usually conveys the idea of portfolios emphasizing or including only issues currently showing low price-to-book ratios, low price-to-earnings ratios, above-average levels of dividend yield, and market prices believed to be below the issues’ intrinsic values.

a. Identify and provide reasons why, over an extended period of time, value-stock investing might outperform growth-stock investing.

b. Explain why the outcome suggested in ( a ) should not be possible in a market widely regarded as being highly efficient.

In Problems 21–23 below, assume the risk-free rate is 8% and the expected rate of return on the market is 18%.

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a. Is the square root of the variance.

b. Is denominated in the same units as the original data.

c. Can be a positive or a negative number.
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