1 - CMTexcel - Level 1 Questions

2/24/23, 9:36 PM CMTexcel - Level 1 - Assessment Review
Question 1
TB.LI.trends.bas.356
Lesson Reference: Measuring Market Strength
Difficulty: medium
The advance/decline ratio is 1.2 and the ratio for advancing volume to declining volume is 1.1. What is the TRIN (Arms Index)?
Correct
1.09
0.92
1.32
2.30
Rationale
 1.09
Correct: The Trin (Arms Index) measures the relative volume in advancing stocks versus declining stocks. 1.09 is correctly calculated as follows:
(Advance / Decline ratio)/(Advancing volume / Declining volume) = TRIN
(1. 2)/(1. 1) = 1. 09
Rationale
 0.92
Incorrect: The (TRIN) Arms Index is not 0.92. 0.92 is incorrectly calculated as follows:
1. 1/1. 2 = 0. 92
Rationale
 1.32
1. 1 * 1. 2 = 1. 32
Rationale
 2.30
1. 1 + 1. 2 = 2. 30
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Question 2
Explain how a technical analyst uses charts to summarize price action.
CMT1.TB.LI.charts.p1.003_1220
LOS: Explain how a technical analyst uses charts to summarize price action.
Lesson Reference: Introduction to Charts Part 1
Difficulty: easy
Bloom Code: 1
Which statement explains how charts can be used to assess risk?
Charts cannot be used to assess risk.
Your Answer
Hand-drawn charts allowed technicians to have a better feeling of risk.

Correct
Charts can be used to spot periods of high and low price volatility.
Charts were used by fundamental analysts to examine the valuation of a security.
Rationale
 Charts cannot be used to assess risk.
Incorrect. Charts can be used to assess risk by implementing technical analysis methods.
Rationale
 Hand-drawn charts allowed technicians to have a better feeling of risk.
Incorrect. Hand-drawn charts are still used and may serve some purpose for identifying important areas but this does not explain how charts can be
used to assess risk.
Rationale
 Charts can be used to spot periods of high and low price volatility.
Correct. With experience, a technician is able to spot periods of high and low price volatility, which is helpful in assessing risk.
Rationale
 Charts were used by fundamental analysts to examine the valuation of a security.
Incorrect. Although some fundamental analysts do employ technical analysis, although not specifically for valuation of securities, it does not
explain how charts can be used to assess risk.
Question 3
TB.LI.dow.theory.282
Lesson Reference: Dow Theory
Difficulty: easy
Which statement regarding primary bear market phases is correct?
Correct
The third phase represents distress selling.
The duration can be up to several months.

Your Answer
The first phase represents selling due to decreased earnings.
The second phase represents abandonment of hopes upon which stocks were purchased.
Rationale
 The third phase represents distress selling.
Correct. The third phase is distress selling, regardless of value, by those who believe the worst is yet to come or who are forced to liquidate.
Rationale
 The duration can be up to several months.
Incorrect. The duration of a trend is not part of the phases of a primary bear market.
Rationale
 The first phase represents selling due to decreased earnings.
Incorrect. The first phase of a primary bear market is not selling due to decreased earnings.
Rationale
 The second phase represents abandonment of hopes upon which stocks were purchased.
Incorrect. The second phase of a primary bear market is not abandonment of hopes upon which stocks were purchased.
Question 4
Explain the use of options volume and open interest as sentiment Indicators
tb.LI.sent.meas.mark.0002_1901
LOS: Explain the use of options volume and open interest as sentiment Indicators
Lesson Reference: Sentiment Measures from Market Data
Difficulty: easy
Bloom Code: 2
__________ generally have greater open interest in calls than puts and ____________ generally have greater open interest in puts than calls.
Correct
Equities/ETFs
Indexes/ETFs
Your Answer
ETFs/equities
Futures/REITs
Rationale
 Equities/ETFs
Correct: For equities, the open interest in calls will generally be greater than the open interest in puts. However, the open interest in options for
indexes and for exchange-traded funds (ETFs) shows the opposite behavior. Buying put options on indexes is a popular strategy to hedge a
portfolio.
Rationale
 Indexes/ETFs
Incorrect: Indexes do not generally have greater open interest in calls than puts. ETFs do generally have greater open interest in puts than calls.
Rationale
 ETFs/equities
Incorrect: ETFs do not generally have greater open interest in calls than puts. Equities generally do not have greater open interest in puts than calls.
Rationale
 Futures/REITs
Incorrect: Futures do not generally have greater open interest in calls than puts. REITs generally do not have greater open interest in puts than calls.
Question 5
TB.LI.meas.mkt.str.164
Difficulty: medium
__________________ when the A/D line does not fall to new lows with the market.
Your Answer
A bull move is about to start

Correct
The bear move is nearing its end
The next leg of the bear move is about to start after a brief reaction
The bear move has ended
Rationale
 A bull move is about to start
Incorrect: A positive divergence signal coming from the A/D line can precede a reversal by weeks or even months.
Rationale
 The bear move is nearing its end
Correct: A positive divergence in which the A/D line makes a shallower bottom to the market signals the bear move is nearing its end. Price
confirmation would be needed.
Rationale
 The next leg of the bear move is about to start after a brief reaction
Incorrect: There is a divergence between A/D and the market. The interpretation would not be that the next leg of a bear market would resume after
a brief reaction.
Rationale
 The bear move has ended
Incorrect: There is a divergence between A/D and the market. The interpretation would not be that the bear move has ended. Price confirmation
would be needed.
Question 6
Define “fractal” and how it relates to chart construction
LOS: Define “fractal” and how it relates to chart construction
Difficulty: easy
Bloom Code: 1
Which of the following best describes “fractals” in regard to candlestick charts?
Fractals are reversal candlestick patterns made up of three candlesticks.
Your Answer
Fractals are continuation candlestick patterns made up of five candlesticks.

Correct
Fractals are reversal candlestick patterns made up of five candlesticks.
Fractals are continuation candlestick patterns made up of three candlesticks.
Rationale
 Fractals are reversal candlestick patterns made up of three candlesticks.
Incorrect. Fractals are reversal candlestick patterns made up of five candlesticks.
Rationale
 Fractals are continuation candlestick patterns made up of five candlesticks.
Rationale
 Fractals are reversal candlestick patterns made up of five candlesticks.
Correct. Because of the fractal nature of trends, meaning trends tend to act similarly over different periods of time, once an analyst knows the basic
methods of charting, those methods can be applied in any time frame from very short-term intra-day trading to long-term investing.
Rationale
 Fractals are continuation candlestick patterns made up of three candlesticks.
Question 7
TB.LI.anat.elliott.wave.204
Lesson Reference: The Anatomy of Elliott Wave Trading
Difficulty: medium
Which of the following options is not an Elliott Wave pattern?
Triangle
Your Answer
Zigzag
Correct
Wedge
Diagonal
Rationale
 Triangle
Incorrect. A triangle can be found both in classic chart patterns and in Elliott Wave.
Rationale
 Zigzag
Incorrect. A zigzag is a corrective pattern in Elliott Wave.
Rationale
 Wedge
Correct. A wedge is found in classical chart patterns, but not in Elliott Wave. The wedge is a short-term pattern with converging trendlines which
slant either to the upside or downside.
Rationale
 Diagonal
Incorrect. A diagonal is a type of motive wave in Elliot Wave.
Question 8
Classify currency pairs as “major” or “cross”
tb.LI.for.ex.0002_1901
LOS: Classify currency pairs as “major” or “cross”
Lesson Reference: Foreign Exchange (Currencies)
Difficulty: easy
Bloom Code: 2
Which of the following is an example of a major currency pair and a cross-rate pair?
EURJPY/EURUSD
GBPUSD/AUDUSD
Your Answer
EURJPY/GBPJPY
Correct
EURUSD/EURJPY
Rationale
 EURJPY/EURUSD
Incorrect: EUR/JPY is not a major currency pair, and EUR/USD is not a cross-rate pair.
Rationale
 GBPUSD/AUDUSD
Incorrect: GBP/USD and AUD/USD are both major currency pairs; therefore, there is not a cross-rate pair.
Rationale
 EURJPY/GBPJPY
Incorrect: EUR/JPY and GBP/JPY are both cross-rate pairs; therefore, there is not a major pair.
Rationale
 EURUSD/EURJPY
Correct: EURUSD is a major pair and EURJPY is a cross.
Question 9
Difficulty: easy
Which market condition is identified when prices are extremely low with dull declines and price rallies on increased volume?
Correct
Oversold market
Overbought market
Your Answer
Market that is fairly priced
Bull market
Rationale
 Oversold market
Correct. Extremely low prices with dull declines and increased volume on rallies suggest an oversold market.
Rationale
 Overbought market
Incorrect. An overbought market would not be identified by extremely low prices with dull declines and price rallies on increased volume.
Rationale
 Market that is fairly priced
Incorrect. A fairly priced market is not a market condition identified when prices are extremely low with dull declines and price rallies on increased
volume.
Rationale
 Bull market
Incorrect. A bull market is not a market condition identified with extremely low prices on dull declines and price rallies on increased volume.
Question 10
Difficulty: easy
Identify the term for the longest trend according to Dow theory.
Correct
Primary trend
Your Answer
Secondary trend
Minor trend
Consolidation trend
Rationale
 Primary trend
Correct. The primary trend is the longest of three trends as stated in Dow theory.
Rationale
 Secondary trend
Incorrect. The secondary trend is not the longest trend in Dow theory.
Rationale
 Minor trend
Incorrect. The minor trend is not the longest trend in Dow theory.
Rationale
 Consolidation trend
Incorrect. A consolidation trend, which would be a sideways trend, is not the longest trend in Dow theory.
Question 11
Identify the variables plotted on the axes in a conventional price chart.
LOS: Identify the variables plotted on the axes in a conventional price chart.
Difficulty: easy
Bloom Code: 1
Select which type of charts record time series data with price on the vertical y-axis and time on the horizontal x-axis.
Candlestick, Ichimoku cloud, bar
Correct
Bar, line, candlestick

Your Answer
Volume, line, bar
Line, bar, point-and-figure
Rationale
 Candlestick, Ichimoku cloud, bar
Incorrect. The Ichimoku cloud does not record time series data with price on the vertical y-axis and time on the horizontal x-axis.
Rationale
 Bar, line, candlestick
Correct. Line, bar, and candlestick charts all record time series data with price on the vertical x-axis and time on the horizontal y-axis.
Rationale
 Volume, line, bar
Incorrect. A volume-scaled chart does not record price on the vertical y-axis.
Rationale
 Line, bar, point-and-figure
Incorrect. Point-and-figure charts are not constructed using time.
Question 12
Define “survivorship bias”
tb.LI.indexes.0005_1901
LOS: Define “survivorship bias”
Lesson Reference: Indexes
Difficulty: easy
Bloom Code: 2
Which statement identifies why survivorship bias can have a significant impact on back-testing done on an index's data?
An analyst can have a strong bias toward times when the index was doing well and ignore other periods.
Your Answer
One can favor one particular index calculation over the others and become overly biased toward that calculation method.
One might be biased toward periods of outperformance for a strategy.

Correct
Back-testing may not be representative of testing or trading the individual components that were dropped off from the index.
Rationale
 An analyst can have a strong bias toward times when the index was doing well and ignore other periods.
Incorrect: An analyst's bias regarding the index's performance is not why survivorship bias can have a significant impact on back-testing done on an
index's data.
Rationale
 One can favor one particular index calculation over the others and become overly biased toward that calculation method.
Incorrect: Favoring one index over another is not related to why survivorship bias can have a significant impact on back-testing done on an index's
data.
Rationale
 One might be biased toward periods of outperformance for a strategy.
Incorrect: A bias toward periods of outperformance for an individual's strategy is not why survivorship bias can have a significant impact on back-
testing done on an index's data.
Rationale
 Back-testing may not be representative of testing or trading the individual components that were dropped off from the index.
Correct: This aspect of survivorship bias can have significant impact on back-testing done on index data. Such back tests are not representative of
testing or trading the individual components. The process of removing failing companies from an index mitigates the impact the weak performers
would have had on a trading system.
Question 13
Define “range” in regard to prices on a bar or candlestick.
LOS: Define “range” in regard to prices on a bar or candlestick.
Difficulty: easy
Bloom Code: 1
Which statement is correct regarding bar charts?
A bar chart may omit the low price of the day.
Your Answer
A bar chart may omit the high price of the day.
A bar chart may omit the closing price of the day.

Correct
A bar chart may omit the opening price of the day.
Rationale
 A bar chart may omit the low price of the day.
Incorrect. Bar chart data does not omit the low price of the day.
Rationale
 A bar chart may omit the high price of the day.
Incorrect. Bar chart data does not omit the high price of the day.
Rationale
 A bar chart may omit the closing price of the day.
Incorrect. Bar chart data does not omit the closing price of the day.
Rationale
 A bar chart may omit the opening price of the day.
Correct. In addition to the closing price, the bar chart displays at least two additional pieces of information: the highest price (H) at which the stock
traded during the day and the lowest price (L) at which the stock traded during the day. A fourth piece of information, the opening price (O) for the
day, is also displayed on some bar charts.
Question 14
TB.LI.eff.mkt.hypoth.158
Lesson Reference: What is the Efficient Market Hypothesis
Difficulty: easy
Which of the following is a major limitation of the efficient market hypothesis?
Alexander's filter technique
Correct
Animal spirits
The concept of randomness
Probability theory
Rationale
 Alexander's filter technique
Incorrect: Alexander's filter technique is a trading model that attempts to take advantage of trends in prices. It is not the major limitation of the
EMH.
Rationale
 Animal spirits
Correct: Human behavior is central to the limitations of the EMH. Our behavior is not always rational and can break down due to any number of
factors. This breakdown causes us to revert to instinctive behavior like herding or the fight-or-flight response. At times like these, our animal spirits
control our decision-making processes.
Rationale
 The concept of randomness
Incorrect: Randomness is also known as noise. The efficient market hypothesis states that in a properly functioning market, changes in market
prices are fundamentally unpredictable because they are random. Randomness therefore supports the efficient market hypothesis; it is not the
major limitation of the EMH.
Rationale
 Probability theory
Incorrect: Probability theory is at the core of the random walk hypothesis, which is not the same as the efficient market hypothesis. It is not the
major limitation of the EMH.
Question 15
Describe a dominant cycle
tb.LI.found.cyc.theory.0006_1901
LOS: Describe a dominant cycle
Lesson Reference: Foundations of Cycle Theory
Difficulty: easy
Bloom Code: 2
Select the most accurate choice.
The most visually evident cycle on a chart is defined as the
Correct
Dominant cycle.
Harmonic cycle.
Right-translated cycle.
Fixed cycle.
Rationale
 Dominant cycle.
Correct: A dominant cycle is the most visually evident cycle on a chart.
Rationale
 Harmonic cycle.
Incorrect: Dominant cycle is the correct answer.
Rationale
 Right-translated cycle.
Rationale
 Fixed cycle.
Question 16
Explain how value investing (Graham and Dodd) conflicts with the EMH
TB.LI.forerun.beh.fin.0006.1119
LOS: Explain how value investing (Graham and Dodd) conflicts with the EMH
Lesson Reference: The Forerunners to Behavioral Finance
Difficulty: medium
Bloom Code: 1
The concept that value investing was a viable method to beat the markets for investors also meant that _______________.
Your Answer
technical analysis had no value
prices were never random

Correct
the EMH had a serious challenge
prices were most definitely random
Rationale
 technical analysis had no value
Incorrect: Value investing as a method to beat the markets did not also mean that technical analysis had no value.
Rationale
 prices were never random
Incorrect: Value investing as a method to beat the markets did not also mean that prices were never random.
Rationale
 the EMH had a serious challenge
Correct: Value investing as a method to beat the markets is the opposite of efficient market hypothesis (EMH).
Rationale
 prices were most definitely random
Incorrect: Value investing as a method to beat the markets did not also mean that prices were most definitely random.
Question 17
Describe typical methods for displaying volume in a price chart.
LOS: Describe typical methods for displaying volume in a price chart.
Difficulty: medium
Bloom Code: 1
Which statement best describes an equivolume chart?
Correct
Volume and price are represented in the same candle on the horizontal axis.
Your Answer
Each candle on the horizontal axis represents one hour of trading.
Each bar on the horizontal axis will be the same height.
The vertical height of the candle on the vertical axis represents the volume.
Rationale
 Volume and price are represented in the same candle on the horizontal axis.
Correct. An equivolume candle is constructed with a rectangle for each day. The height of the rectangle depicts price range and the width of the
rectangle depicts volume.
Rationale
 Each candle on the horizontal axis represents one hour of trading.
Incorrect. Time is not represented in equivolume candles.
Rationale
 Each bar on the horizontal axis will be the same height.
Incorrect. The heights of an equivolume candle will vary depending on the data inputs.
Rationale
 The vertical height of the candle on the vertical axis represents the volume.
Incorrect. Equivolume candles are not displayed on the vertical axis.
Question 18
Describe a normal probability distribution
tb.LI.intro.prob.0004_1901
LOS: Describe a normal probability distribution
Lesson Reference: Introduction to Probability
Difficulty: easy
Bloom Code: 2
______________ is a variation of the normal distribution, and is a commonly used distribution in finance.
Correct
Log-normal distribution
Gaussian distribution
Uniform distribution
Binomial distribution
Rationale
 Log-normal distribution
Correct: A variation of the normal distribution is the log-normal distribution, which refers to a random variable whose logarithm is normally
distributed. This is a commonly used distribution in finance because in some markets it has been found to be a better approximation of return
distributions.
Rationale
 Gaussian distribution
Incorrect: Human heights and weights across populations tend to display a more or less Gaussian distribution. Gaussian distribution is not a
variation of the normal distribution.
Rationale
 Uniform distribution
Incorrect: Uniform distribution is not a variation of the normal distribution.
Rationale
 Binomial distribution
Incorrect: Binomial distribution is not a variation of the normal distribution.
Question 19
Difficulty: medium
Jesse is holding a stock currently trading at $50 per share. He observes the 50-day moving average is at $40 per share. How should he interpret this
information?
Correct
The market is bullish on this stock.
The market is bearish on this stock.
The stock is overvalued.
The stock is undervalued.
Rationale
 The market is bullish on this stock.
Correct: When a stock trades above its moving average, the current consensus of value is above average or bullish.
Rationale
 The market is bearish on this stock.
Incorrect: When a stock is trading above the moving average it is not considered bearish.
Rationale
 The stock is overvalued.
Incorrect: Overvaluing a stock would be determined using fundamental analysis and not with a moving average.
Rationale
 The stock is undervalued.
Incorrect: Undervaluing a stock would be determined using fundamental analysis and not with a moving average.
Question 20
Identify the basic terms of a debt instrument: duration, maturity, coupon, issuer
tb.LI.fix.in.bond.0002_1901
LOS: Identify the basic terms of a debt instrument: duration, maturity, coupon, issuer
Lesson Reference: Fixed Income/Bonds
Difficulty: easy
Bloom Code: 1
Which is the term for the date an issuer returns the principal back to the bond holder?
Correct
Maturity
Coupon
Principal
Par value
Rationale
 Maturity
Correct: The maturity of a bond is the date at which the issuer returns the principal back to the bond holder.
Rationale
 Coupon
Incorrect: The coupon is the periodic interest payment made to the bond holder. It is not the term for the date an issuer returns the principal back
to the bond holder.
Rationale
 Principal
Incorrect: Principal refers to the amount of the face value of the bond. It is not the term for the date an issuer returns the principal back to the bond
holder.
Rationale
 Par value
Incorrect: Par value refers to the nominal, or face, value of a bond in percentage terms. It is not the term for the date an issuer returns the principal
back to the bond holder.
Question 21
Difficulty: easy
Which statement identifies the action an informed trader should take when three or more ads appear in a major publication touting the same stock
buying opportunity?
Your Answer
Heed the advice and buy.
Ignore the advice.

Correct
Look at technical indicators for shorting signals.
Research the fundamentals.
Rationale
 Heed the advice and buy.
Incorrect: The media are not informed traders, so you should never look to them for trading advice.
Rationale
 Ignore the advice.
Incorrect: The informed trader should always ignore the advice of the media; however, this is not the statement that correctly identifies the action
that should be taken.
Rationale
 Look at technical indicators for shorting signals.
Correct: By the time the new media recognizes the trend and starts reporting on it, it is likely that a top cannot be too far away. The best thing to do,
therefore, would be to start looking for shorting signals.
Rationale
 Research the fundamentals.
Incorrect: A technician believes that fundamental information is already incorporated into price. The reports by the media touting the stock are a
sentiment indicator and should be treated as such.
Question 22
Define probability
LOS: Define probability
Difficulty: easy
Bloom Code: 2
Which of the following best defines probability?
A measure of the randomness
Your Answer
A measure of the distribution of variables

Correct
It measures the extent to which an event is likely to occur
A measure of the occurrence of different possible outcomes for a random variable
Rationale
 A measure of the randomness
Incorrect: Probability is not defined as a measure of randomness.
Rationale
 A measure of the distribution of variables
Incorrect: Probability is not defined as a measure of the distribution of variables.
Rationale
 It measures the extent to which an event is likely to occur
Correct: Probability measures the extent to which an event is likely to occur. Probabilities are measured on a scale between 0 and 1.
Rationale
 A measure of the occurrence of different possible outcomes for a random variable
Incorrect: A measure of the occurrence of different possible outcomes for a random variable describes probability distribution; however, it does not
define probability.
Question 23
TB.LI.bas.prin.tech.249
Lesson Reference: The Basic Principle of Technical Analysis — The Trend
Difficulty: easy
Which statement is not an assumption underlying technical analysis?
Prices are determined by the interaction of supply and demand.
Your Answer
Price discounts everything.

Correct
Prices are usually at equilibrium.
Prices are non-random.
Rationale
 Prices are determined by the interaction of supply and demand.
Incorrect. This is an assumption underlying technical analysis. Price is the result of the meeting of supply and demand at a point in time. When
prices change, it is due to a change in demand or supply or both.
Rationale
 Price discounts everything.
Incorrect. This is the idea that all known information about the particular security as well as the interpretation of expectations derived from that
information are incorporated into the current price of the security.
Rationale
 Prices are usually at equilibrium.
Correct. Except for the instant moment that supply and demand meet, that prices are usually at equilibrium is not an assumption underlying
technical analysis.
Rationale
 Prices are non-random.
Incorrect. Technical analysis is based on one major assumption and it is that in a free market, prices will generally travel in trends.
Question 24
Discuss the advantages of reviewing price information in chart format.
LOS: Discuss the advantages of reviewing price information in chart format.
Difficulty: medium
Bloom Code: 1
Choose the statement that is most likely to be true.
A chart will always contain data points from all time intervals.
Correct
Charts allow investors to understand the supply and demand equilibrium.
Charts are only used by technical analysts.
Charts must be drawn on a daily time frame since there is only one closing price a day.
Rationale
 A chart will always contain data points from all time intervals.
Incorrect. Different time intervals determine the data points so one chart does not contain all data points from all time frames.
Rationale
 Charts allow investors to understand the supply and demand equilibrium.
Correct. Remember that the price of a security at any particular point in time provides a summary of supply and demand for that security at that
moment. A chart offers a concise price history and, thus, provides investors with essential information about market forces.
Rationale
 Charts are only used by technical analysts.
Incorrect. Charts are used by traders, investors, fundamental analysts, and a wide spectrum of market participants.
Rationale
 Charts must be drawn on a daily time frame since there is only one closing price a day.
Incorrect. Charts can be drawn on any time frame.
Question 25
Describe the challenges of using sentiment indicators
tb.LI.mark.sent.tech.0004_1901
LOS: Describe the challenges of using sentiment indicators
Lesson Reference: Market Sentiment and Technical Analysis
Difficulty: easy
Bloom Code: 2
Sentiment indicators _____________.
have frequent and reoccurring and false signals
Your Answer
are impossible to quantify and test
are predominantly equity-centric

Correct
have a delayed time between sentiment signals and a market turn
Rationale
 have frequent and reoccurring and false signals
Incorrect: Most sentiment signals are far between and are often associated with significant changes in trend.
Rationale
 are impossible to quantify and test
Incorrect: A good number of sentiment indicators can be derived from survey readings, ratios, and data provided by various entities. All of those are
quantifiable and can be backtested.
Rationale
 are predominantly equity-centric
Incorrect: Sentiment readings can be applied to any freely traded financial instruments. Moreover, they can be applied to asset classes that aren't
tradeable, such as real estate.
Rationale
 have a delayed time between sentiment signals and a market turn
Correct: Sentiment indicators can have a delayed period of time between the signal and an actual market turn. Sentiment readings should not be
applied alone, and should be confirmed with technical tools and price.
Question 26
Explain the purpose of options markets
tb.LI.options.0001_1901
LOS: Explain the purpose of options markets
Lesson Reference: Options
Difficulty: easy
Bloom Code: 2
___________ is one of the benefits of trading options.
Your Answer
Favorable tax treatment
Reduced transaction cost

Correct
Hedging
Diversification
Rationale
 Favorable tax treatment
Incorrect: There is no preferred tax treatment associated with options markets, this would not be one of the benefits of trading options.
Rationale
 Reduced transaction cost
Incorrect: There may or may not be reduced transaction costs trading options; this is not considered one of the benefits.
Rationale
 Hedging
Correct: A hedge is like an insurance policy in that it helps to mitigate risk for a small fee.
Rationale
 Diversification
Incorrect: Diversification is not one of the benefits of trading options.
Question 27
Difficulty: easy
The breadth indicator calculated as the number of advancing stocks divided by the number of declining stocks is:
the overbought/oversold index.
Correct
the advance/decline ratio.
advancing, declining, and unchanged issues.
new high and new low prices.
Rationale
 the overbought/oversold index.
Incorrect: The overbought/oversold index is calculated as the number of advancing stocks divided by the number of declining stocks.
Rationale
 the advance/decline ratio.
Correct: The advance/decline raio is derived by dividing the number of declines from the number of advances.
Rationale
 advancing, declining, and unchanged issues.
Incorrect: Advancing, declining, and unchanged issues are based on stocks rising or falling in a single day.
Rationale
 new high and new low prices.
Incorrect: New high and new low prices is the number of stocks attaining these levels based on the past 52 weeks.
Question 28
Difficulty: easy
Which statement correctly describes confirmation in Dow theory?
Correct
The industrial and railroad averages reach new lows together on a daily closing basis.
Your Answer
The industrial average reaches a new low and the railroad average reaches a new high on a daily closing basis.
The industrial average reaches a new high and the railroad average reaches a new low on a daily closing basis.
The industrial and railroad averages reach new highs at some point over the past 12 months.
Rationale
 The industrial and railroad averages reach new lows together on a daily closing basis.
Correct. Confirmation occurs when both the industrial and railroad averages reach new highs or lows together on a daily closing basis. These new
levels do not necessarily have to be reached at the same time.
Rationale
 The industrial average reaches a new low and the railroad average reaches a new high on a daily closing basis.
Incorrect. Confirmation occurs when both the industrial and railroad averages reach new highs or lows together on a daily closing basis. These new
Rationale
 The industrial average reaches a new high and the railroad average reaches a new low on a daily closing basis.
Rationale
 The industrial and railroad averages reach new highs at some point over the past 12 months.
Question 29
Difficulty: easy
Identify one of the reasons for the criticism that technical analysis has not evolved with changing times.
Your Answer
A decline in trading of large blocks of shares
Market segregation
Correct
Technicians not willing to reinterpret their tools
Day traders
Rationale
 A decline in trading of large blocks of shares
Incorrect. The rise of institutional trading in large blocks of shares has transformed the markets since the 1950s.
Rationale
 Market segregation
Incorrect. The integration of domestic and worldwide markets has transformed the markets since the 1950s.
Rationale
 Technicians not willing to reinterpret their tools
Correct. Technical analysis practitioners have traditionally sought to use technical analysis solely for generating forecasts. Technical analysis can
be more valuable when used for quantitative study and for risk management. Technicians who focus entirely on forecasting perpetuate the
stereotypes that academics criticize.
Rationale
 Day traders
Incorrect. The presence of day traders changes the market environment, which was historically comprised primarily of long-term investors.
Question 30
Lesson Reference: Academic Approaches to Technical Analysis
Difficulty: easy
The framework of the Adaptive Markets Hypothesis is based on principles; which of the following is not one of the principles?
Correct
Political science
Your Answer
Evolution
Competition
Adaptation
Rationale
 Political science
Correct. Political science is not one of the principles that is incorporated into the Adaptive Markets Hypothesis.
Rationale
 Evolution
Incorrect. Evolution is one of the principles of the Adaptive Markets Hypothesis.
Rationale
 Competition
Incorrect. Competition is one of the principles of the Adaptive Markets Hypothesis.
Rationale
 Adaptation
Incorrect. Adaptation is one of the principles of the Adaptive Markets Hypothesis.
Question 31
Describe the actions of technical traders as noise traders in the context of market valuation
TB.LI.noise.tdrs.tech.004.0319
LOS: Describe the actions of technical traders as noise traders in the context of market valuation
Lesson Reference: Noise Traders as Technical Traders
Difficulty: hard
Bloom Code: 2
What is the only reason for stock price movements if investor psychology is not a factor, according to Shiller?
Correct
Anticipation of dividend payments
Fundamental business improvements
Stock buybacks
Interest rates
Rationale
 Anticipation of dividend payments
Correct: Shiller argues that the EMH implies that the price of a stock at any point in time is simply an optimal forecast of the future stream of
dividends. Consequently, if the price of a given stock moves, more often than not that movement should reflect movement in future dividends from
that stock. However, the data does not bear out such a finding. If investor psychology cannot be a factor in price movements according to the EMH,
Shiller argues that that leaves only anticipation of dividend movements as a driver of stock prices, so that stock price movements should generally
be followed by changes to dividends. The fact that empirical evidence does not support that conclusion, he argues, casts doubt on the EMH as a
complete model of stock price movements.
Rationale
 Fundamental business improvements
Incorrect: Fundamental business improvements is not the reason for stock price movements if investor psychology is not a factor, according to
Shiller.
Rationale
 Stock buybacks
Incorrect: Stock buybacks is not the reason for stock price movements if investor psychology is not a factor, according to Shiller.
Rationale
 Interest rates
Incorrect: Interest rates is not the reason for stock price movements if investor psychology is not a factor, according to Shiller.
Question 32
Difficulty: easy
Which of the following statements about Charles Dow is correct?
Correct
Charles Dow was the first person to create a stock market index.
Charles Dow specifically formulated Dow theory.
Charles Dow presented three hypotheses, including that the primary trend is inviolate.
Charles Dow performed the first formal test of the profitability of trading using Dow theory.
Rationale
 Charles Dow was the first person to create a stock market index.
Correct. Charles Dow, the father of modern technical analysis, was the first person to create an index that measures the overall price movement of
U.S. stocks.
Rationale
 Charles Dow specifically formulated Dow theory.
Incorrect. Charles Dow never specifically formulated what has become known as Dow theory.
Rationale
 Charles Dow presented three hypotheses, including that the primary trend is inviolate.
Incorrect. Charles Dow did not present three hypotheses, which included observations on the primary trend being inviolate. Robert Rhea presented
these three hypotheses.
Rationale
 Charles Dow performed the first formal test of the profitability of trading using Dow theory.
Incorrect. Alfred Cowles III performed the first formal test of the profitability of trading using Dow theory.
Question 33
TB.LI.und.impl.vol.004
Lesson Reference: Understanding Implied Volatility
Difficulty: medium
What is the closest single-day implied volatility if the annualized implied volatility is 55% for an option with a single trading day remaining?
Your Answer
0.22%
2.88%
Correct
3.47%
0.15%
Rationale
 0.22%
Incorrect: 0.22% incorrectly assumes that the denominator is 252.
0.22% = 55%/252
Rationale
 2.88%
Incorrect: 2.88% incorrectly assumes that the denominator is the square root of 365.
2.88% = 55%/19.10
Rationale
 3.47%
Correct: The single-day implied volatility is the single standard deviation range of expected price movement of the stock on that day. It is calculated
as follows, where 252 represents the number of trading days in a year:
1-day movement = Implied volatility/Square root of 252
3.47% = 55%/15.87
Rationale
 0.15%
Incorrect: 0.15% incorrectly assumes that the denominator is 365.
0.15% = 55%/365
Question 34
Restate common seasonal tools
tb.LI.basic.cyc.analysis.0003_1901
LOS: Restate common seasonal tools
Lesson Reference: Basics of Cycle Analysis
Difficulty: easy
Bloom Code: 2
You are a technical analyst at a research firm. You were assigned to study notable seasonality patterns in the year 2017 and report your findings to your
boss.
Identify the seasonality tool that would give you a more realistic feel for the correlation levels within 2017.
Your Answer
Seasonality charts
A detrended moving average chart
An A/D line chart

Correct
Composite chart
Rationale
 Seasonality charts
Incorrect: The most accurate tool for this purpose would be the composite chart.
Rationale
 A detrended moving average chart
Rationale
 An A/D line chart
Rationale
 Composite chart
Correct: A composite chart breaks up historical price action into different slices of time according to a common period and overlays them on top of
each other. An average is usually displayed with a thicker line to reinforce the cycle's general pattern. This is most commonly done with a one-year
period in order to observe seasonal correlation. Studying a market's seasonal cycle this way gives an analyst a more realistic feel for the correlation
levels within an individual year.
Question 35
Identify the three areas in which behavioral finance challenges the EMH
tb.LI.eff.mkt.hypoth.0007.1119
LOS: Identify the three areas in which behavioral finance challenges the EMH
Difficulty: medium
Bloom Code: 1
Finance economists dismissed anecdotal evidence that challenged the EMH as unscientific until recent years. Which statement describes the reason?
Casual observers were falsifying data.
Your Answer
The EMH was impossible to prove wrong.

Correct
That markets are efficient.
That technical analysis was superior to fundamental analysis.
Rationale
 Casual observers were falsifying data.
Incorrect: Casual observers falsifying data is not the reason finance economists dismissed anecdotal evidence against the EMH.
Rationale
 The EMH was impossible to prove wrong.
Incorrect: The EMH being impossible to prove wrong is not the reason finance economists dismissed anecdotal evidence against the EMH.
Rationale
 That markets are efficient.
Correct: The three different ways to confront the EMH correspond to casual observations that have persisted and echoed through financial markets
since their beginning. These observations were dismissed just as casually by finance economists as minor and unscientific. Until very recently, the
preponderant view among finance economists was that markets were efficient and that casual observers were wrong.
Rationale
 That technical analysis was superior to fundamental analysis.
Incorrect: Technical analysis being superior to fundamental analysis is not the reason finance economists dismissed anecdotal evidence against the
EMH.
Question 36
Difficulty: medium
Which statement describes the theory of contrary opinion?
Buying opportunities are marked by strong bullishness among newsletter writers.
Correct
A high degree of consensus precedes reversals.

Your Answer
Market newsletter writers are most bullish at market bottoms.
Bullishness helps sell subscriptions.
Rationale
 Buying opportunities are marked by strong bullishness among newsletter writers.
Incorrect: The theory of contrary opinion is not described as buying opportunities that are marked by strong bullishness among newsletter writers.
Newsletter writers are usually most bullish during strong bull markets.
Rationale
 A high degree of consensus precedes reversals.
Correct: When everyone agrees on the direction of the trend, there is usually no one left to buy and so a reversal is likely. This is a central concept
underlying the theory of contrary opinion.
Rationale
 Market newsletter writers are most bullish at market bottoms.
Incorrect: Most newsletter writers are not known to be most bullish at market bottoms. This does not describe the theory of contrary opinion.
Market newsletter writers are often most bearish at market bottoms.
Rationale
 Bullishness helps sell subscriptions.
Incorrect: Even though it is true that bullishness does help to sell subscriptions, this does not describe the contrary opinion theory.
Question 37
Difficulty: easy
Which statement best identifies the reason inexperienced traders struggle?
Your Answer
They follow the crowd.
They second-guess themselves.

Correct
They trade on their gut reaction to price changes.
They are too analytical.
Rationale
 They follow the crowd.
Incorrect: It is true, many inexperienced traders follow the crowd; however, this is not the main reason why they struggle.
Rationale
 They second-guess themselves.
Incorrect: Second guessing or hesitating is a common error inexperienced traders make; however, this is not the main reason why they struggle.
Rationale
 They trade on their gut reaction to price changes.
Correct: Trading on gut reactions to price changes encompasses many errors inexperienced traders make. Gut reactions involve acting on emotions
rather then a structured trade plan with a specific approach that has been tested.
Rationale
 They are too analytical.
Incorrect: Inexperienced traders can be too analytical. "Paralysis of analysis" is a common term; however, that is not the main reason why they
struggle.
Question 38
Difficulty: easy
The VIX index and the S&P 500 historically have moved ___________ each other.
Your Answer
correlated with
within two standard deviations of

Correct
inversely to
within the same range as
Rationale
 correlated with
Incorrect: The VIX index and the S&P 500 are not correlated.
Rationale
 within two standard deviations of
Incorrect: Standard deviations do not apply to the relationship of movement between the VIX index and the S&P 500.
Rationale
 inversely to
Correct: The VIX index and the S&P 500 move inversely to each other. When price in the S&P 500 moves down, the VIX moves up. When price in the
S&P 500 moves up, the VIX moves down.
Rationale
 within the same range as
Incorrect: The VIX index and the S&P 500 do not move within the same range.
Question 39
TB.LI.about.vix.213
Lesson Reference: About the VIX Index
Difficulty: medium
Which statement defines the VIX?
Your Answer
It is a measure of annualized implied volatility as indicated by the pricing of S&P options.
It is a measure of historical volatility as indicated by the pricing of S&P options.
It is a measure of 30-day historical volatility as indicated by the pricing of S&P options.

Correct
It is a measure of 30-day implied volatility as indicated by the pricing of S&P options.
Rationale
 It is a measure of annualized implied volatility as indicated by the pricing of S&P options.
Incorrect: The standardized calculation for the VIX does not use an annualized figure.
Rationale
 It is a measure of historical volatility as indicated by the pricing of S&P options.
Incorrect: The standardized calculation for the VIX does not use historical volatility in its calculation.
Rationale
 It is a measure of 30-day historical volatility as indicated by the pricing of S&P options.
Incorrect: The calculation of the VIX does not use historical volatility in its calculation.
Rationale
 It is a measure of 30-day implied volatility as indicated by the pricing of S&P options.
Correct: The midpoint of the bid–ask spread of certain at-the-money and out-of-the-money actively traded S&P 500 index options is used to
calculate the VIX. Also the contracts used are those that trade to the next two standard expiration dates. They must also have at least eight days
remaining to expiration.
Question 40
Difficulty: medium
You buy XYZ stock at 40, you place your stop at 38. Your expectation is that the stock will appreciate to 46. Your Risk-Reward ratio is:
Your Answer
0.33 – 1
1:3
Correct
3:1
4:1
Rationale
 0.33 – 1
Incorrect.
Rationale
 1:3
Incorrect.
Rationale
 3:1
Correct. (p.309) Even though it's called a risk-reward ratio, the ratio is conventionally stated with the reward figure first. So, in this example, even
though risk is 1 and the reward 3, the ratio is stated as 3:1, rather than 1:3. This explains why a 3:1 risk-reward ratio is desirable. It's actually a
reward-risk ratio.
Rationale
 4:1
Incorrect.
Question 41
Difficulty: medium
Bloom Code: 1
Which of the following describes when two vertical y-axis scales might be used?
Your Answer
When comparing short-term trend of two assets similarly priced.
When comparing short-term trend of two assets with much different values.
Correct
When comparing long-term trend of two assets with much different values.
When comparing long-term trend of two assets in the same sector.
Rationale
 When comparing short-term trend of two assets similarly priced.
Incorrect. Two vertical y-axis scales would not be used for short-term trend analysis of two assets, regardless of price.
Rationale
 When comparing short-term trend of two assets with much different values.
Incorrect. Two vertical y-axis scales would not be used for short-term trend analysis of two assets, regardless of values.
Rationale
 When comparing long-term trend of two assets with much different values.
Correct. Sometimes analysts are interested in comparing the long-term trend of two variables with much different absolute values. Using two
different vertical scales, creating both a left y-axis and a right y-axis, allows for two variables with much different values to be plotted in the same
graph.
Rationale
 When comparing long-term trend of two assets in the same sector.
Incorrect. Two vertical y-axis scales would not necessarily be used for two assets in the same sector unless there is a wide difference in particular
variables.
Question 42
List and define Hurst's seven Principles of Commonality
LOS: List and define Hurst's seven Principles of Commonality
Difficulty: easy
Bloom Code: 2
Select the statement that best defines the principle of variation.
Your Answer
The position of a cycle relative to its most recent trough
Price is a composite wave of the sum of individual cycles.
Cycle lows tend to bottom in tandem.

Correct
Cycles in financial markets will not obey theoretical perfection.
Rationale
 The position of a cycle relative to its most recent trough
Incorrect: This is the definition of a phase, which is one of the defining characteristics of cycles.
Rationale
 Price is a composite wave of the sum of individual cycles.
Incorrect: This statement defines the principle of summation and not variation.
Rationale
 Cycle lows tend to bottom in tandem.
Incorrect: This describes the principle of synchronicity and not variation.
Rationale
 Cycles in financial markets will not obey theoretical perfection.
Correct: Cycles in financial markets are messier than the perfection found in cycle theory, as the principle of variation states.
Question 43
Difficulty: easy
Dr. Andrew Lo proposed the Adaptive Markets Hypothesis. This was an attempt to reconcile ideas from ______________ and the Efficient Market
Hypothesis (EMH).
Correct
behavioral finance
corporate finance
mathematics
chemistry
Rationale
 behavioral finance
Correct. The Adaptive Market Hypothesis reconciles the theories from the EMH and behavioral finance. The framework is based on the principles of
evolution, competition, adaptation, and natural selection in which markets and players change over time.
Rationale
 corporate finance
Incorrect. Corporate finance was not one of the ideas reconciled in the Adaptive Markets Hypothesis.
Rationale
 mathematics
Incorrect. The topic of mathematics was not included in the Adaptive Markets Hypothesis.
Rationale
 chemistry
Incorrect. The topic of chemistry was not included in the Adaptive Markets Hypothesis.
Question 44
Describe two methods of detrending price data
LOS: Describe two methods of detrending price data
Difficulty: easy
Bloom Code: 2
Identify a detrending method that fails to account for changing price history.
Your Answer
Percentage change
Linear regression
Correct
Median price
Moving average detrending
Rationale
 Percentage change
Incorrect: The correct answer from these options is median price.
Rationale
 Linear regression
Rationale
 Median price
Correct: Significant changes in price levels over periods of time can erroneously influence detrending results. This is an important problem to
address for markets with long periods of price history as well as continuous futures contracts that retroactively adjust historical price levels. Note
that the average price and median price methods of detrending fail to account for changing price history.
Rationale
 Moving average detrending
Question 45
TB.LI.intro.wave.prin.108
Lesson Reference: Introduction to the Wave Principle
Difficulty: medium
A truncation can happen in which wave?
Your Answer
4
Correct
Rationale
 1
Incorrect. A truncation does not happen in wave 1.
Rationale
 3
Rationale
 4
Rationale
 5
Correct. A truncation occurs when wave 5 fails to terminate beyond the end of wave 3.
Question 46
Discuss alternative methods of calculating the mean and their uses
tb.LI.intro.des.stat.0002_1901
LOS: Discuss alternative methods of calculating the mean and their uses
Lesson Reference: Introduction to Descriptive Statistics
Difficulty: medium
Bloom Code: 2
Which of the following is a field in which using geometric mean is a large benefit?
Looking at categorical data
Your Answer
Income surveys
Correct
Portfolio construction
The volatility of results in a large database
Rationale
 Looking at categorical data
Incorrect: Categorical data is not the field in which using geometric mean is a large benefit. Geometric mean is a less common average outside the
finance world.
Rationale
 Income surveys
Incorrect: Income surveys is not the field in which using geometric mean is a large benefit. Geometric mean is a less common average outside the
finance world.
Rationale
 Portfolio construction
Correct: The geometric mean is unique in that it can be used to find an average across items that have different scales. In other words, the
observations in a geometric mean are scaling factors, not absolutes. This is useful in applications like portfolio construction.
Rationale
 The volatility of results in a large database
Incorrect: The volatility of results in a large database is not the field in which using geometric mean is a large benefit. Geometric mean is a less
common average outside the finance world.
Question 47
Difficulty: easy
Which answer choice identifies why markets break down?
Public participation
Correct
Animal spirits
Noise traders
Uninformed traders
Rationale
 Public participation
Incorrect: The public is often slow to recognize the existence of a trend, but when they recognize that the trend is in existence they will enter the
market. Their participation usually increases the life of the trend. It does not cause markets to break down.
Rationale
 Animal spirits
Correct: When the delicate balance among several different brain functions, including emotion, logical deliberation, and memory, is upset for any
reason, then reason and rational behavior are cast aside in favor of more instinctive behavior or our animal spirits.
Rationale
 Noise traders
Incorrect: Noise traders are those traders who are not knowledgeable or rational. But their trading does not usually cause markets to break down.
Rationale
 Uninformed traders
Incorrect: Uninformed traders are those who have no information about the economic true value of a security but simply trade for liquidity. Markets
do not break down because they participate in them because the informed traders will likely cancel them out.
Question 48
Discuss volume as an alternative to time on the x‐axis of a chart.
LOS: Discuss volume as an alternative to time on the x‐axis of a chart.
Difficulty: medium
Bloom Code: 1
Which statement describes the similarity of equivolume and volume-scaled charts?
Your Answer
Both chart types display price on the horizontal axis.

Correct
Heavy trading volume takes up more horizontal space in both types of charts.
Both chart types place more emphasis on the progression of price over a unit of volume.
Both chart types display both time and price within the bars.
Rationale
 Both chart types display price on the horizontal axis.
Incorrect. Both charts do not display price on the horizontal axis.
Rationale
 Heavy trading volume takes up more horizontal space in both types of charts.
Correct. Volume-scaled charts and equivolume charts are similar in that a day with heavy trading volume will take up more horizontal space in the
chart.
Rationale
 Both chart types place more emphasis on the progression of price over a unit of volume.
Incorrect. More emphasis on the progression of price over a unit of volume does not describe the similarity of equivolume and volume-scaled
charts.
Rationale
 Both chart types display both time and price within the bars.
Incorrect. Equivolume bars and volume-scaled bars do not display time and price within the bar.
Question 49
Review the information available in line, bar, and candlestick charts.
LOS: Review the information available in line, bar, and candlestick charts.
Difficulty: easy
Bloom Code: 1
Which statement regarding differences between bar charts and candlestick charts is correct?
Your Answer
A candle in a candlestick chart is plotted using the open, high, low, mid, and close prices.
A candlestick chart is used for daily and monthly charts, and not for intraday prices.
A candlestick chart can be plotted only with a white body and a black body.
Correct
The difference between the bar chart and candlestick chart is that the closing and opening prices are connected by a rectangle.
Rationale
 A candle in a candlestick chart is plotted using the open, high, low, mid, and close prices.
Incorrect. A candlestick is not constructed using mid prices.
Rationale
 A candlestick chart is used for daily and monthly charts, and not for intraday prices.
Incorrect. Candlestick charts are used for all time intervals.
Rationale
 A candlestick chart can be plotted only with a white body and a black body.
Incorrect. Depending on the trading days prices, a candlestick chart can be constructed with or without a real body, either black or white.
Rationale
 The difference between the bar chart and candlestick chart is that the closing and opening prices are connected by a rectangle.
Correct. The major difference between the bar chart and the candlestick chart is that a rectangle connects the opening and closing prices. A
candlestick chart can include a real body which has the appearance of a rectangle. A bar chart will display a single vertical line with a horizontal
mark on the right and left depicting the open and close.
Question 50
Describe how to construct line, bar, and candlestick charts.
LOS: Describe how to construct line, bar, and candlestick charts.
Difficulty: medium
Bloom Code: 1
Which statement regarding bar charts is correct?
Your Answer
A bar chart contains more information than a line chart, as each bar will always additionally contain the bid, offer, high, and low prices.
Correct
A bar chart contains more information than a line chart, as each bar will at least additionally contain the high and low prices.
A bar chart is a superior form of charting compared to line charts.
A small tick mark on the right side of the bar indicates the opening price for the day.
Rationale
 A bar chart contains more information than a line chart, as each bar will always additionally contain the bid, offer, high, and low prices.
Incorrect. A bar chart does not contain bid or offer prices.
Rationale
 A bar chart contains more information than a line chart, as each bar will at least additionally contain the high and low prices.
Correct. In addition to the closing price, the bar chart displays at least two additional pieces of information: the highest price (H) at which the stock
traded during the day and the lowest price (L) at which the stock traded during the day. A fourth piece of information, the opening price (O) for the
day, is also displayed on some bar charts.
Rationale
 A bar chart is a superior form of charting compared to line charts.
Incorrect. Bar charts and line charts both offer valuable sets of information for traders and technical analysts.
Rationale
 A small tick mark on the right side of the bar indicates the opening price for the day.
Incorrect. A small tick mark on the right side of the bar would not indicate the opening price for the day.
Question 51
Recall some sequences/nonlinear cycles
LOS: Recall some sequences/nonlinear cycles
Difficulty: easy
Bloom Code: 2
Identify the answer that best fills the space below.
Fibonacci and Lucas are thought to be __________________.
Your Answer
Fixed economic cycles
Detrended cycles
Elliott Wave tools

Correct
Nonlinear cycles
Rationale
 Fixed economic cycles
Incorrect: Fibonacci and Lucas are nonlinear cycles.
Rationale
 Detrended cycles
Incorrect: Fibonacci and Lucas are nonlinear cycles.
Rationale
 Elliott Wave tools
Incorrect: While Fibonacci retracements are used in projecting probable Elliott wave retracements, the Fibonacci tool mentioned here is one
applied to the Y axis of the chart and not price.
Rationale
 Nonlinear cycles
Correct: Fibonacci and Lucas are nonlinear cycles.
Question 52
Name other common non‐equity indexes used by technical analysts
LOS: Name other common non‐equity indexes used by technical analysts
Difficulty: easy
Bloom Code: 2
What is the correct classification of the SONIA Index?
Correct
Interest rate index

Your Answer
Equity index
Commodity index
Economic index
Rationale
 Interest rate index
Correct: SONIA (Sterling Over-Night Interbank Average Rate) is an interest rate index.
Rationale
 Equity index
Incorrect: The SONIA index is not classified as an equity index.
Rationale
 Commodity index
Incorrect: The SONIA index is not classified as a commodity index.
Rationale
 Economic index
Incorrect: The SONIA index is not classified as an economic index.
Question 53
Define “yield curve”
LOS: Define “yield curve”
Difficulty: medium
Bloom Code: 2
The slope of the yield curve suggests conditions about the underlying economy of a country. Which statement describes the position of short-term rates
and long-term rates with a downward sloping yield curve?
A downward-sloping yield curve means
Your Answer
Long-term rates are higher than short-term rates.
Short-term rates are lower than long-term rates.

Correct
Short-term rates are higher than long-term rates.
Short-term rates are at par with long-term rates.
Rationale
 Long-term rates are higher than short-term rates.
Incorrect: This happens when we have an upward-sloping yield curve.
Rationale
 Short-term rates are lower than long-term rates.
Incorrect: This happens when we have an upward-sloping yield curve.
Rationale
 Short-term rates are higher than long-term rates.
Correct: A flat or downward-sloping yield curve means short-term rates are higher than long-term rates, which typically happens when an economy
is struggling.
Rationale
 Short-term rates are at par with long-term rates.
Incorrect: Short-term and long-term rates would not be at par with a downward sloping yield curve.
Question 54
Difficulty: medium
Which statement describes why the crowd is nearly always wrong at turning points?
Correct
The market has become one-sided.
The crowd is made up of amateur investors.
The professionals have bet against the crowd.
The market is unbeatable.
Rationale
 The market has become one-sided.
Correct: When everyone seems to be in agreement, then it is likely that the market has become too one-sided. When markets are too one-sided,
then there is no one left to propel the trend forward.
Rationale
 The crowd is made up of amateur investors.
Incorrect: Professional and amateur investors alike often get it wrong.
Rationale
 The professionals have bet against the crowd.
Incorrect: Professionals often bet against the crowd at turning points, but during trends they are often on the same side.
Rationale
 The market is unbeatable.
Incorrect: There are some people who are able to consistently beat the market irrespective of what EMH says.
Question 55
Difficulty: medium
Calculate the A/D line for Day 1 using;
Total number of stocks traded = 5,000

Total number of advancing stocks = 3,200
Total number of declining stocks = 1,200
Number of unchanged stocks = 400
Which is the correct answer?
2,400
Your Answer
1,600
Correct
2,000
5,000
Rationale
 2,400
Incorrect: 2,400 is not the correct calculation for the A/D line.
Rationale
 1,600
Rationale
 2,000
Correct: The A/D line is the cumulative sum of advances minus declines.
3,200 (Number advancing) − 1,200 (Number declining) = 2,000.
Each day's sum following day 1 would would be added to the Breadth Line Value.
Rationale
 5,000
Question 56
Define short interest
LOS: Define short interest
Difficulty: easy
Bloom Code: 1
What is the calculation for the days-to-cover indicator?
The total short interest for the week divided by the average daily volume for that week
Correct
The aggregate short interest for the month divided by the average daily share volume
Your Answer
The total short interest for the month divided by the average daily share volume with the data calculated on the 15th of the month when brokerage
firms report their outstanding short interest
The average short interest for the month divided by the average daily share volume with the data calculated 8 days after brokerage firms submit their
short interest holdings, which are usually reported on the 15th
Rationale
 The total short interest for the week divided by the average daily volume for that week
Incorrect: Days to cover is not calculated as total short interest for the week divided by the average daily volume for that week.
Rationale
 The aggregate short interest for the month divided by the average daily share volume
Correct: Days to cover is calculated as the aggregate short interest for the month divided by the average daily share volume. This is also known as
the short interest ratio.
Rationale
 The total short interest for the month divided by the average daily share volume with the data calculated on the 15th of the month
when brokerage firms report their outstanding short interest
Incorrect: Days to cover is not calculated as the total short interest for the month divided by the average daily share volume with the data
calculated on the 15th of the month when brokerage firms report their outstanding short interest.
Rationale
 The average short interest for the month divided by the average daily share volume with the data calculated 8 days after brokerage
firms submit their short interest holdings, which are usually reported on the 15th
Incorrect: Days to cover is not calculated as the average short interest for the month divided by the average daily share volume with the data
calculated 8 days after brokerage firms submit their short interest holdings, which are usually reported on the 15th.
Question 57
Difficulty: easy
Which of the following describes how put and call prices are linked to each other?
Implied volatility
VIX
Correct
Put–call parity
Historical volatility
Rationale
 Implied volatility
Incorrect: The implied volatility of an option is an estimate of the projected move of the underlying security over a certain period of time. This does
not describe how put and call prices are linked to each other.
Rationale
 VIX
Incorrect: Officially known as the CBOE Volatility Index, the VIX measures the implied volatility that is being priced into S&P 500 index options. This
does not describe how put and call prices are linked to each other.
Rationale
 Put–call parity
Correct: Put and call prices are linked to each other through the price of the underlying stock through put–call parity. This link exists because
combining a stock and a put position can result in the same payoff as a position in a call option with the same strike price as the put. If this
relationship gets out of line or not in parity, an arbitrage opportunity exists.
Rationale
 Historical volatility
Incorrect: Historical volatility is calculated using the past trading activity of a security. It does not link put and call prices to each other. This does
not describe how put and call prices are linked to each other.
Question 58
Describe data‐handling issues with which a technician should be familiar
tb.LI.mark.instru.data.tech.0004_1901
LOS: Describe data‐handling issues with which a technician should be familiar
Lesson Reference: Markets, Instruments, Data, and the Technical Analyst
Difficulty: medium
Bloom Code: 2
When a stock trades 35, 31, 36, 35, and 41, a vendor will use a __________to try and determine the validity of the last trade.
Correct
Data filter
Data feed
Message system
Paper trade
Rationale
 Data filter
Correct: A data filter is used by the vendor when a sudden order appears to be out of the range. They assess whether it is a valid trade.
Rationale
 Data feed
Incorrect: Data feed is not the correct term when there is a suspected trade price error.
Rationale
 Message system
Incorrect: Message system is not the correct term when there is a suspected trade price error.
Rationale
 Paper trade
Incorrect: Paper trade is not the correct term when there is a suspected trade price error.
Question 59
Difficulty: easy
Bloom Code: 1
A bar chart contains less information than a line chart.
A bar chart contains more information than a candlestick chart.

Your Answer
A candlestick chart is more useful than a line chart.

Correct
The difference between the high and low prices in a bar chart is known as the range.
Rationale
 A bar chart contains less information than a line chart.
Incorrect. A bar chart has three or four data points and a line chart uses one data point.
Rationale
 A bar chart contains more information than a candlestick chart.
Incorrect. Candlestick charts will visually and vividly display neutral, bullish, or bearish price action. Bar charts, because of the use of a single
vertical line, do not display the drama of candlestick charts.
Rationale
 A candlestick chart is more useful than a line chart.
Incorrect. Both candlestick charts and line charts display valuable information in different forms to traders and analysts.
Rationale
 The difference between the high and low prices in a bar chart is known as the range.
Correct. The range is calculated as the difference between the highest point of a bar chart (the highest price that day) and the lowest point of a bar
chart (the lowest price that day).
Question 60
Describe the benefits of equities for investors
tb.LI.equities.0003_1901
LOS: Describe the benefits of equities for investors
Lesson Reference: Equities
Difficulty: easy
Bloom Code: 2
Which of the following is a benefit of owning stock?
Correct
Income
Unlimited upside potential with a guaranteed income from dividends
Limited, if any, downside risk
Shareholders have top-priority claim over the firm's assets when it is being liquidated
Rationale
 Income
Correct: A large percentage of companies pay dividends to their shareholders.
Rationale
 Unlimited upside potential with a guaranteed income from dividends
Incorrect: While stocks do have unlimited upside potential, they do not offer a guaranteed income from dividends. This is because dividends are
subject to both the company's profitability and management's consent to distribute dividends to investors.
Rationale
 Limited, if any, downside risk
Incorrect: This is incorrect, as stocks can trade to zero, and companies go out of business.
Rationale
 Shareholders have top-priority claim over the firm's assets when it is being liquidated
Incorrect: When liquidating a company, the company's debt and liens are paid first before any money can be distributed to shareholders.
Question 61
Difficulty: easy
Identify the general length of time a secondary correction during a primary long-term trend will last, according to Dow theory.
Your Answer
Two to three weeks

Correct
A few weeks to a few months
A few months to a few years
50% of the length of the primary trend
Rationale
 Two to three weeks
Incorrect. A secondary reaction does not usually last for two to three weeks. According to Dow theory, the minor trend is usually from two to three
weeks.
Rationale
 A few weeks to a few months
Correct. A secondary reaction in a bull market is considered to be an important decline, usually lasting from three weeks to three months.
Rationale
 A few months to a few years
Incorrect. A secondary decline within a primary trend usually does not last as long as a few years.
Rationale
 50% of the length of the primary trend
Incorrect. Dow theory never stated that the secondary reaction in a primary bull market would usually last 50% of the length of the primary trend.
Question 62
Explain how the annual cycle conforms to cycle theory
LOS: Explain how the annual cycle conforms to cycle theory
Difficulty: easy
Bloom Code: 2
Select the choices that best fill the spaces below.
The ______ cycle is also known as the cycle of the sun. It is the most common natural cycle analyzed and is present in all markets. It heavily influences
commodity markets and is less influential on fixed income and _______.
Your Answer
Kuznets/forex markets
Juglar/energy markets
Correct
Annual/forex markets
Annual/energy markets
Rationale
 Kuznets/forex markets
Incorrect: The passage in the question describes the annual cycles and it is present in, although less influential on, fixed income and equities.
Rationale
 Juglar/energy markets
Rationale
 Annual/forex markets
Correct: This describes the annual cycles and it is present in, although less influential on, fixed income and equities.
Rationale
 Annual/energy markets
Question 63
TB.LI.about.vix.217
Lesson Reference: About the VIX Index
Difficulty: medium
Which of the following is the reason the VIX moves inversely to the market?
Your Answer
Net buying of call options

Correct
Net buying of put options
A breakdown in the put–call parity
Arbitrage
Rationale
 Net buying of call options
Incorrect: The inverse relationship of the VIX and the market is not due to net buying of call options.
Rationale
 Net buying of put options
Correct: When the market is under pressure, there is usually a rapid increase in buying of put options, which pushes up the implied volatility for
both put and call contracts.
Rationale
 A breakdown in the put–call parity
Incorrect: A breakdown in the put-call parity is not the reason the VIX moves inversely to the market.
Rationale
 Arbitrage
Incorrect: Arbitrage opportunities present themselves if the price of one option is different enough from the price of the other. However, it is not the
reason the VIX moves inversely to the markets.
Question 64
Explain the impact of the law of large numbers on a series of outcomes
LOS: Explain the impact of the law of large numbers on a series of outcomes
Difficulty: easy
Bloom Code: 2
Which of the following explains why a single trade, within a non-chance trading strategy, may be random, but the probabilistic expectation is that over a
large number of trades the observed win rate converges with the true win rate of the strategy?
Your Answer
Positive skew
Kurtosis
Correct
The law of large numbers
The probability of normal distribution
Rationale
 Positive skew
Incorrect: Positive skew refers to the deviations from the mean. It does not explain the probabilistic expectation that over a large number of trades
the observed win rate converges with the true win rate of the strategy.
Rationale
 Kurtosis
Incorrect: Kurtosis measures the degree to which returns show up in the tails of a distribution. It does not explain the probabilistic expectation that
over a large number of trades the observed win rate converges with the true win rate of the strategy.
Rationale
 The law of large numbers
Correct: Assuming a true high-probability trading strategy, one where the alpha generated is not due purely to chance, the outcome of any single
trade might be random, but the probabilistic expectation is that over a large number of trades the observed win rate converges with the true win
rate of the strategy.
Rationale
 The probability of normal distribution
Incorrect: The probability of normal distribution is an expectation that observations will only exceed two standard deviations above or below the
mean 5% of the time. It does not explain the probabilistic expectation that over a large number of trades the observed win rate converges with the
true win rate of the strategy.
Question 65
Difficulty: easy
Which statement is one of the theorems of Dow theory?
Correct
Prices trend.
Human psychology should be used to explain stock market action.
Retracements are not part of the ideal market picture.
Consolidations are not part of the ideal market picture.
Rationale
 Prices trend.
Correct. One of the theorems of Dow theory is that prices trend.
Rationale
 Human psychology should be used to explain stock market action.
Incorrect. Human psychology was not formally one of the theorems of Dow theory. However, almost all of the market technicians of the time
referred to the struggles of this topic. Dow theory focused on economic rationale being used to explain stock market action.
Rationale
 Retracements are not part of the ideal market picture.
Incorrect. Retracements were included in the ideal market picture. It consisted of an uptrend, top, downtrend, and bottom, interspersed with
retracements and consolidations.
Rationale
 Consolidations are not part of the ideal market picture.
Incorrect. Consolidations were included in the ideal market picture. It consisted of an uptrend, top, downtrend, and bottom, interspersed with
retracements and consolidations.
Question 66
Discuss the importance of the “crowd”
LOS: Discuss the importance of the “crowd”
Difficulty: easy
Bloom Code: 2
Which statement best explains why institutional managers can shape the sentiment of a particular stock, and sometimes influence the crowd's opinion?
Correct
They have access to constant appearances on media outlets.
They have a track record of outperforming the market.
They have insider information they share in newsletters.
They have a longer time horizon for investing.
Rationale
 They have access to constant appearances on media outlets.
Correct: Large managers also affect the sentiment of individual investors. They are interviewed on CNBC, speak to reporters at Bloomberg, and
express their thoughts via other media outlets. Their opinions are often available to individual investors and that contributes to the sentiment of
individual investors. This contributes to why they can influence the crowd's opinion and shape its sentiment.
Rationale
 They have a track record of outperforming the market.
Incorrect: A track record of outperforming the market is positive; however, it does not describe why an institutional manager could influence a
crowd's opinion and shape the sentiment of a particular stock.
Rationale
 They have insider information they share in newsletters.
Incorrect: Sharing insider information in a newsletter would make for a short career for an institutional manager because of the illegality. This
would not be why institutional managers can influence crowds and shape sentiment.
Rationale
 They have a longer time horizon for investing.
Incorrect: Institutional managers do usually have longer time horizons for investing; however, this does not describe why they can influence crowds
and shape sentiment.
Question 67
Identify the four basic price points represented in charting.
LOS: Identify the four basic price points represented in charting.
Difficulty: easy
Bloom Code: 1
Which answer choice identifies the four basic price points in charting?
Your Answer
Open/high/mid/close
Open/bid/offer/close
Correct
Open/high/low/close
Change/high/low/close
Rationale
 Open/high/mid/close
Incorrect. Mid is not a price point on a chart.
Rationale
 Open/bid/offer/close
Incorrect. Bid and offer are not price points on a chart.
Rationale
 Open/high/low/close
Correct. The candlestick records the three pieces of data that are always included in the bar chart: high, low, and close. The candlestick is more
inclusive, however, in that the opening price, which is sometimes omitted from a bar chart, is always recorded on the candlestick chart.
Rationale
 Change/high/low/close
Incorrect. Change is not a price point on a chart.
Question 68
Difficulty: medium
Bloom Code: 1
XBZ symbol closed the trading day showing an equivolume bar higher and wider than on the last several trading days. Which of the following statements
best describes the interpretation of this bar?
Your Answer
The wide bar shows that volume increased over several trading days.
The wide bar shows that price range and volatility increased.
The tall bar shows that price and volume decreased.

Correct
The tall and wide bar shows that price and volume increased.
Rationale
 The wide bar shows that volume increased over several trading days.
Incorrect. Equivolume bars are constructed to display more than one set of data.
Rationale
 The wide bar shows that price range and volatility increased.
Incorrect. Equivolume bars do not directly display volatility.
Rationale
 The tall bar shows that price and volume decreased.
Incorrect. A taller equivolume bar would not be interpreted as a decrease of volume.
Rationale
 The tall and wide bar shows that price and volume increased.
Correct. The height of the bar depicts the price range and the width of the bar depicts the volume, so an unusually tall and wide bar implies both
have increased.
Question 69
Difficulty: medium
Which of the following most closely defines implied volatility?
Your Answer
The projection of the movement of the historical volatility using the bell curve
The projection that the price of the underlying stock should be at option expiration in a range, up or down, of one standard deviation 62.8 percent of
the time
Correct
The projection that the price of the underlying stock should be at option expiration in a range, up or down, of one standard deviation 68.2 percent of
the time
The potential direction of the underlying stock
Rationale
 The projection of the movement of the historical volatility using the bell curve
Incorrect: The projection of the movement of the historical volatility using the bell curve is not related to the definition of implied volatility. The
projection of the movement of the historical volatility using the bell curve is not related to the definition of implied volatility.
Rationale
 The projection that the price of the underlying stock should be at option expiration in a range, up or down, of one standard deviation
62.8 percent of the time
Incorrect: The one standard deviation percentage is not 62.8.
Rationale
 The projection that the price of the underlying stock should be at option expiration in a range, up or down, of one standard deviation
68.2 percent of the time
Correct: The implied volatility of an option is the projection of an annualized one standard deviation move in the underlying stock over the life of
the option. According to statistics, one standard deviation is 68.2 percent.
Rationale
 The potential direction of the underlying stock
Incorrect: Implied volatility is not concerned with the potential direction of the stock price move but rather the magnitude of the move.
Question 70
Difficulty: medium
Bloom Code: 1
Which statement is most likely to be correct?
Your Answer
The four key prices of an hour cannot be represented by a candlestick, which is used for representing daily prices.
Correct
The four key prices of a candlestick make it easier for a trader to spot patterns and changes in trends more quickly.
The four key prices of any data interval can be used to assess the liquidity of a stock.
The four key prices in a trading day are open-mid-high-low.
Rationale
 The four key prices of an hour cannot be represented by a candlestick, which is used for representing daily prices.
Incorrect. The four key prices of an hour: open, high, low, close, are represented on a candlestick bar.
Rationale
 The four key prices of a candlestick make it easier for a trader to spot patterns and changes in trends more quickly.
Correct. The candlestick chart provides a more nuanced display of four key prices for a trading day, often making it easier for a trader to spot
patterns and see changes in trends more quickly.
Rationale
 The four key prices of any data interval can be used to assess the liquidity of a stock.
Incorrect. The four key prices of any data interval would not be used to assess liquidity of a stock.
Rationale
 The four key prices in a trading day are open-mid-high-low.
Incorrect. The four key prices in a trading day are not open-mid-high-low.
Question 71
Describe what is meant by “data interval.”
LOS: Describe what is meant by “data interval.”
Difficulty: medium
Bloom Code: 1
Which statement regarding data intervals is correct?
Your Answer
The larger the data interval, the more frequent the data collection.
A daily chart shows less detail than a monthly chart.

Correct
Line charts are especially useful when studying long-term trends.
“Data interval” refers to the time period captured by the chart.
Rationale
 The larger the data interval, the more frequent the data collection.
Incorrect. Larger data intervals such as a daily chart, would collect the open, high, low and close for the day considerably less frequently than an
intraday chart.
Rationale
 A daily chart shows less detail than a monthly chart.
Incorrect. A daily charts shows more detail than a monthly chart.
Rationale
 Line charts are especially useful when studying long-term trends.
Correct. Line charts are especially useful when studying long-term trends. They provide a simple, concise way to view summary statistics. Line
charts are particularly useful for long term trends as they smooth the data and expose the trend.
Rationale
 “Data interval” refers to the time period captured by the chart.
Incorrect. Data interval refers to the units or intervals on the x-axis.
Question 72
Difficulty: easy
Which statement regarding primary bull market phases is correct?
Correct
The third phase represents speculation becoming dominant and rising stock prices.
Your Answer
The duration can be up to several months.
It represents the overall, broad, short-term movement of stock prices.
The second phase represents reviving confidence from the prior primary bear market.
Rationale
 The third phase represents speculation becoming dominant and rising stock prices.
Correct. The third phase is when speculation becomes dominant and prices rise on “hopes and expectations.”
Rationale
 The duration can be up to several months.
Incorrect. The duration of a trend is not part of the phases of a primary bull market.
Rationale
 It represents the overall, broad, short-term movement of stock prices.
Incorrect. The overall, broad, short-term movement of stock prices is not part of the phases of a primary bull market.
Rationale
 The second phase represents reviving confidence from the prior primary bear market.
Incorrect. The second phase of a primary bull market does not include reviving confidence from the prior primary bear market.
Question 73
Identify the three defining characteristics of a cycle
LOS: Identify the three defining characteristics of a cycle
Difficulty: easy
Bloom Code: 2
The position of a cycle relative to its most recent trough
Identify the cycle characteristic that best defines the statement above.
Your Answer
Period
Amplitude
Harmonicity
Correct
Phase
Rationale
 Period
Incorrect: Period is the unit of time between two consecutive troughs of the same cycle.
Rationale
 Amplitude
Incorrect: Amplitude is defined as the height between a cycle's midpoint and crest or trough.
Rationale
 Harmonicity
Incorrect: Harmonicity is a principle of cycles as outlined by Hurst and not a defining characteristic of a cycle.
Rationale
 Phase
Correct: Phase is the position of a cycle relative to its most recent trough.
Question 74
Difficulty: easy
Which of the following describes what a downtrend is characterized by?
Correct
Lower troughs and lower peaks
Lower troughs and higher peaks
Higher peaks and higher troughs
Prices trading in a range without significant upward movement
Rationale
 Lower troughs and lower peaks
Correct. Downtrends are characterized by lower peaks and lower troughs.
Rationale
 Lower troughs and higher peaks
Incorrect. Downtrends are not characterized by lower troughs and higher peaks.
Rationale
 Higher peaks and higher troughs
Incorrect. Downtrends are not characterized by higher peaks and higher troughs.
Rationale
 Prices trading in a range without significant upward movement
Incorrect. Downtrends are not characterized by prices trading in a range without significant upward movement.
Question 75
Difficulty: medium
Which of the following is not a rule in Elliott wave?
Correct
One motive wave, either wave 3 or wave 5, is usually extended.
Wave 2 never moves beyond the start of wave 1.
Wave 3 is never the shortest motive wave.
Wave 4 never enters the price territory of wave 1.
Rationale
 One motive wave, either wave 3 or wave 5, is usually extended.
Correct. This is a guideline, not a rule.
Rationale
 Wave 2 never moves beyond the start of wave 1.
Incorrect. This is a rule. Wave 2 must always retrace less than 100% of wave 1.
Rationale
 Wave 3 is never the shortest motive wave.
Incorrect. This is a rule. Wave 3 cannot be the shortest motive wave although it does not have to be the longest.
Rationale
 Wave 4 never enters the price territory of wave 1.
Incorrect. This is a rule.
Question 76
State the ways in which debt prices are expressed
LOS: State the ways in which debt prices are expressed
Difficulty: medium
Bloom Code: 2
Which of the following is what short-term debt may be priced in?
Correct
Discounted yield
Dollars
The bond grading
Rounded decimal points
Rationale
 Discounted yield
Correct: An example of discounted yields is a Treasury bill sold below par to an investor. The investor may redeem it at maturity at par with no other
interest payments or otherwise made.
Rationale
 Dollars
Incorrect: Short-term debt does not refer to dollars as being how the debt is priced.
Rationale
 The bond grading
Incorrect: The bond grading refers to a rating and does not describe how short-term debt may be priced.
Rationale
 Rounded decimal points
Incorrect: Rounded decimal points are not how short-term debt may be priced.
Question 77
Identify the base and quote currencies in a pair
LOS: Identify the base and quote currencies in a pair
Difficulty: easy
Bloom Code: 1
Which statement is the interpretation of a rising currency pair observed on an FX chart?
Your Answer
Quote is stronger.
Correct
Base currency is stronger.
Base is weaker.
Exchange rate is going up.
Rationale
 Quote is stronger.
Incorrect: A rising pairing on an FX chart would not be interpreted as a quote being stronger.
Rationale
 Base currency is stronger.
Correct: A quick way to remember what the chart says is to keep in mind that when a currency pair rises in value, it is the base currency that is
stronger. The potential risk from critics is that the cryptocurrency markets could be used for illegal purposes such as money laundering.
Rationale
 Base is weaker.
Incorrect: A rising pairing on an FX chart would not be interpreted as the base being weaker.
Rationale
 Exchange rate is going up.
Incorrect: A rising pairing on an FX chart would not be interpreted as an exchange rate going up.
Question 78
Discuss the impact on technical analysis of the “dealer market” system of currency trading
LOS: Discuss the impact on technical analysis of the “dealer market” system of currency trading
Difficulty: medium
Bloom Code: 2
Which of the following tools is used for technical analysis that would face issues when used on a cash forex market chart?
Classical charting patterns
Your Answer
Elliott wave counts
Point-and-figure charts
Correct
Indicators
Rationale
 Classical charting patterns
Incorrect: Classical charting patterns would not face issues on a cash forex market chart.
Rationale
 Elliott wave counts
Incorrect: Elliott wave patterns would not face issues on a cash forex market chart.
Rationale
 Point-and-figure charts
Incorrect: Point-and-figure charts would not face issues on a cash forex market chart.
Rationale
 Indicators
Correct: Most vendors distribute bids and asks but not actual traded prices. Therefore, by convention, charts plot bids. The close would be the final
bid of a given interval. This could have implications for indicators and is something that must be considered when using such data for back testing
and monitoring trading systems.
Question 79
Difficulty: hard
Technical analysts and the Efficient Market Hypothesis coexist through an internally consistent framework called _______________.
Your Answer
the random walk hypothesis

Correct
the Adaptive Market Hypothesis
probability theory
regression analysis
Rationale
 the random walk hypothesis
Incorrect: The random walk hypothesis, which posits that prices are unpredictable because they are random, does not allow EMH and technical
analysis to coexist.
Rationale
 the Adaptive Market Hypothesis
Correct: According to Andrew Lo, markets are not always efficient, nor are they always irrational. They are adaptive. Behavior that one may view as
irrational is simply behavior that has not yet had time to fully adapt and therefore to become efficient.
Rationale
 probability theory
Incorrect: The concept of randomness, which is directly related to the evolution of probability theory, does not provide an internally consistent
framework for both EMH and technical analysis to coexist.
Rationale
 regression analysis
Incorrect: Regression analysis is a way of measuring the relationship between two or more sets of data.
Question 80
Define Describe VIX as a sentiment measure
LOS: Define Describe VIX as a sentiment measure
Difficulty: easy
Bloom Code: 1
Which of the following is factored into the VIX?
Your Answer
S&P 500 index futures closing

Correct
S&P 500 index call and put options
S&P 500 cash prices
S&P 500 put options alone
Rationale
 S&P 500 index futures closing
Incorrect: The S&P 500 index futures closing is not factored into the VIX.
Rationale
 S&P 500 index call and put options
Correct: VIX is a calculation designed to produce a measure of constant 30-day expected volatility of the U.S. stock market, derived from real-time,
mid-quote prices of S&P 500 index call and put options.
Rationale
 S&P 500 cash prices
Incorrect: S&P 500 cash prices are not factored into the VIX.
Rationale
 S&P 500 put options alone
Incorrect: The S&P 500 put options are factored into the VIX; however, there is another component with this.
Question 81
Identify the components of individual candles—real body and shadows.
LOS: Identify the components of individual candles—real body and shadows.
Difficulty: easy
Bloom Code: 1
Which statement is correct in regards to shadows on a candlestick?
Correct
The shadows represent the price range for the day.
The shadows represent the traded volume for the day.
The shadows represent the VWAP for the day.
The shadows represent the change in price for the day.
Rationale
 The shadows represent the price range for the day.
Correct. The thin line that shows the price range for the day forms the shadows. The shadow above the real body is called the upper shadow, and
the shadow below the real body is known as the lower shadow. These shadows can also be referred to as wicks. The shadows represent the price
range for the day.
Rationale
 The shadows represent the traded volume for the day.
Incorrect. Price shadows on a candlestick do not represent the traded volume for the day.
Rationale
 The shadows represent the VWAP for the day.
Incorrect. The shadows on a candlestick do not represent VWAP for the day.
Rationale
 The shadows represent the change in price for the day.
Incorrect. The shadows on a candlestick do not represent the change in price for the day.
Question 82
Difficulty: easy
Which statement is not an assumption technical analysts make?
Correct
Prices are random.
Recognizable patterns form within trends.
Supply and demand determine price.
Rationale
 Prices are random.
Correct. An important corollary to the notion that markets trend is the technical analyst's belief that prices are nonrandom.
Rationale
Incorrect. Technical analysts assume price discounts everything.
Rationale
 Recognizable patterns form within trends.
Incorrect. Technical analysts assume history will repeat and that humans behave similarly to past behavior; this forms patterns with predictable
results.
Rationale
 Supply and demand determine price.
Incorrect. Technical analysts assume price is determined by the interaction of supply and demand.
Question 83
Difficulty: hard
Bloom Code: 1
In comparing the long-term trend of two variables with much different absolute values, a technical analyst may improve the analysis by using two
___________, creating both a _________________and a ____________________.
Your Answer
Different horizontal scales/ left x-axis/right y-axis
Identical horizontal scales/left x-axis/right y-axis

Correct
Different vertical scales/left y-axis/right y-axis
Time frames/vertical scale/horizontal scale
Rationale
 Different horizontal scales/ left x-axis/right y-axis
Incorrect. Different horizontal scales would not be used.
Rationale
 Identical horizontal scales/left x-axis/right y-axis
Incorrect. Identical horizontal scales would not be used.
Rationale
 Different vertical scales/left y-axis/right y-axis
Correct. Using two different vertical scales, creating both a left y-axis and a right y-axis, will allow for two variables with different values to be
plotted in the same graph.
Rationale
 Time frames/vertical scale/horizontal scale
Incorrect. Two time frames and a horizontal scale would not be used.
Question 84
Difficulty: easy
Bloom Code: 1
Which statement is correct in regard to candlestick shadows?
The upper shadow is the shadow below the real body.
Correct
The shadows are also known as the wicks of the candlesticks.

Your Answer
The lower shadow is the shadow above the real body.
On a daily chart, the shadows represent the opening and closing prices at which the security has traded for the day.
Rationale
 The upper shadow is the shadow below the real body.
Incorrect. An upper shadow on a candlestick would not be below the real body.
Rationale
 The shadows are also known as the wicks of the candlesticks.
Correct. The thin line that shows the price range for the day forms the shadows. The shadow above the real body is called the upper shadow, and
the shadow below the real body is known as the lower shadow. These shadows can also be referred to as wicks.
Rationale
 The lower shadow is the shadow above the real body.
Incorrect. The lower shadow on a candlestick would not be above the real body.
Rationale
 On a daily chart, the shadows represent the opening and closing prices at which the security has traded for the day.
Incorrect. Shadows on a candlestick chart, regardless of time interval, do not represent the opening and closing prices for a security.
Question 85
Difficulty: medium
On a day the S&P 500 has 300 advancers and 200 decliners, the advance-decline line will ________.
Correct
rise
fall
not change
fall and then rise
Rationale
 rise
Correct: The breadth line will rise because the number of advancing stocks exceeds the number of declining stocks.
Rationale
 fall
Incorrect: The advance-decline line will not rise on a day advancers exceed decliners. breadth line will rise because the number of advancing stocks
exceeds the number of declining stocks.
Rationale
 not change
Incorrect: The advance-decline line will change on a day advancers exceed decliners.
Rationale
 fall and then rise
Incorrect: The advance-decline line is generally used on a daily or weekly basis, and will not fall and then rise on a day advancers exceed decliners.
Question 86
TB.LI.indexes.082
Difficulty: easy
The ______________ is an index that has been calculated since 1896.
Correct
Dow Jones Industrial Average
Standard & Poor's 500
NASDAQ Composite
Wilshire 5000
Rationale
 Dow Jones Industrial Average
Correct: The DJIA is the oldest index. It was introduced by Charles Dow in 1896.
Rationale
 Standard & Poor's 500
Incorrect: The S&P 500 is not an index calculated since 1896; it was introduced in 1957.
Rationale
 NASDAQ Composite
Incorrect: The NASDAQ is not an index calculated since 1896; it began trading in 1971 and was the world's first electronic stock market.
Rationale
 Wilshire 5000
Incorrect: The Wilshire 5000 Total Market Index is not an index calculated since 1896; it was established in 1974.
Question 87
Difficulty: easy
The _______________ of the EMH assumes that stock prices incorporate all public and private information.
Your Answer
weak form
semi-strong form
Correct
strong form
weak, semi-strong, and strong forms
Rationale
 weak form
Incorrect: The weak form assumes that stock prices incorporate past prices only.
Rationale
 semi-strong form
Incorrect: The semi-strong form assumes that stock prices incorporate all publicly known information.
Rationale
 strong form
Correct: The strong form assumes that stock prices incorporate all information, private as well as public.
Rationale
 weak, semi-strong, and strong forms
Incorrect: The strong form assumes that stock prices incorporate all information, private as well as public.
Question 88
Describe why value investing is similar to a mean-reversion approach
LOS: Describe why value investing is similar to a mean-reversion approach
Difficulty: easy
Bloom Code: 2
Which of the following runs counter to the value investing and mean reversion strategies, which both expect that price will eventually move toward a
standard price level?
Your Answer
The notion of a momentum strategy
Behavioral finance theory
The Capital Allocation Pricing Model

Correct
The Efficient Market Hypothesis
Rationale
 The notion of a momentum strategy
Incorrect: The notion of a momentum strategy is not the statement that would run counter to both the value and mean reversion strategies.
Rationale
 Behavioral finance theory
Incorrect: Behavioral finance theory is not the statement that would run counter to both the value and mean reversion strategies.
Rationale
 The Capital Allocation Pricing Model
Incorrect: The Capital Allocation Pricing Model is not the statement that would run counter to both the value and mean reversion strategies.
Rationale
 The Efficient Market Hypothesis
Correct: This theme meant that markets could be beaten, which is the opposite of the theme of the EMH. Value investing also seemed to be similar
to the message of mean reversion. Stocks that had not done well might be the best “values” because investors overreact emotionally to a string of
bad news without necessarily considering the underlying fundamentals.
Question 89
Define an exchange‐traded product (ETP)
tb.LI.ex.trade.prod.0004_1901
LOS: Define an exchange‐traded product (ETP)
Lesson Reference: Exchange-Traded Products (ETPs)
Difficulty: medium
Bloom Code: 2
Which statement describes the reason two ETFs tracking the same sector, using the same benchmark, have a wide margin of difference in performance
at the end of a fiscal year?
Your Answer
They had different brokers.

Correct
They had different stocks.
They had different lock-up periods.
They had different redemption fees.
Rationale
 They had different brokers.
Incorrect: Although there are certainly transaction fees associated with the activity conducted by the ETF agents or managers, it is unlikely that
brokerage charges will contribute to a significant difference in performance between the two ETFs, therefore, this is not the reason accounting for
the difference of performance.
Rationale
 They had different stocks.
Correct: Although the two ETFs are tracking the same sector and share the same benchmark, it is possible that each has a different underlying
stock. A variation in the weighting of stocks can account for a wide margin of difference in performance at the end of a fiscal year.
Rationale
 They had different lock-up periods.
Incorrect: Lock-up periods are associated with closely held investment vehicles. They do not apply to ETFs; therefore, this is not the reason for the
difference in performance.
Rationale
 They had different redemption fees.
Incorrect: ETFs are bought and sold through the exchange for your typical commission charges, similar to those incurred by purchasing stocks.
There are no redemption fees associated with such transactions; therefore, this does not describe the reason for the wide margin of difference at
the end of a fiscal year.
Question 90
Describe the benefits of equities for investors
LOS: Describe the benefits of equities for investors
Difficulty: easy
Bloom Code: 2
Which of the following describes a benefit of owning stock?
Promised rate of return
Your Answer
Limited downside risk
Shareholders have priority claim over others when liquidating a company

Correct
For capital gains
Rationale
 Promised rate of return
Incorrect: Equities do not offer a promised rate of return; that is a characteristic of bonds.
Rationale
 Limited downside risk
Incorrect: Equities do not have limited downside risk.
Rationale
 Shareholders have priority claim over others when liquidating a company
Incorrect: When liquidating a company, the company's debt is paid first before any money can be distributed to shareholders.
Rationale
 For capital gains
Correct: It is expected that over time companies grow and their stocks increase in value.
Question 91
Difficulty: medium
Bloom Code: 1
Which statement describes a use of line charts?
Your Answer
To display historical data on multiple time intervals

Correct
To provide summary statistics/multiple time series that can be plotted on the same graph
To concisely display volatility periods
To compare short time frames, giving the analyst a concise picture of the data
Rationale
 To display historical data on multiple time intervals
Incorrect. Line charts can be used on historical data, usually viewed in reference to a range of a time period such as 2001 to 2021.
Rationale
 To provide summary statistics/multiple time series that can be plotted on the same graph
Correct. Because line charts provide summary statistics, they are especially useful when information about several different time series is being
plotted in the same graph. This gives analysts a quick, concise picture of the data being discussed.
Rationale
 To concisely display volatility periods
Incorrect. Identifying volatility periods is not the general use for line charts.
Rationale
 To compare short time frames, giving the analyst a concise picture of the data
Incorrect. Applying short time frames to line data is not generally the best use of line charts.
Question 92
Explain the relationship between price and yield
LOS: Explain the relationship between price and yield
Difficulty: medium
Bloom Code: 2
Which of the following is the reason a bond with a 4% coupon drops in value with a rise to 5% in interest rates?
Seasonality patterns
Your Answer
Regulatory reasons
Herd instinct among market participants

Correct
It must offer a lower price to a buyer in order to compete with a newly issued 5% bond
Rationale
 Seasonality patterns
Incorrect: Seasonality patterns rarely exist in bonds.
Rationale
 Regulatory reasons
Incorrect: Regulations do not cause the inverse relationship between yields and bond prices.
Rationale
 Herd instinct among market participants
Incorrect: While a large number of the public do display patterns similar to herds, such action does not offer an explanation to why bond and yield
prices move inversely to each other.
Rationale
 It must offer a lower price to a buyer in order to compete with a newly issued 5% bond
Correct: This is correct because by doing so, the old bond will theoretically enjoy the same yield on the buyer's investment. This is by way of both
interest payments and capital gains when they redeem their bond at face value at maturity.
Question 93
TB.LI.indexes.212
Difficulty: medium
Which index best represents domestic economic trends in the United States?
Dow Jones Industrial Index
Russell 1000 Index

Correct
Russell 2000 Index

Your Answer
Russell 3000 Index
Rationale
 Dow Jones Industrial Index
Incorrect: The DJIA is comprised of only 30 of the largest companies in the United States. The DJIA does not best represent domestic economic
trends in the United States.
Rationale
 Russell 1000 Index
Incorrect: The Russell 1000 is comprised of the 1,000 largest companies in the Russell 3000 index. The Russell 1000 does not best represent
domestic economic trends in the United States.
Rationale
 Russell 2000 Index
Correct: The Russell 2000 index is comprised of small-cap companies which mostly focus on U.S. domestic markets.
Rationale
 Russell 3000 Index
Incorrect: The Russell 3000 index is comprised of all the stocks that make up the Russell 1000 index and the Russell 2000 index. It accounts for 99%
of the market capitalization of the U.S. stock market. The Russell 3000 does not best represent domestic economic trends in the United States.
Question 94
Indicate how mutual fund cash and other funds measures are used to gauge sentiment
tb.LI.sent.meas.data.0005_1901
LOS: Indicate how mutual fund cash and other funds measures are used to gauge sentiment
Lesson Reference: Sentiment Measures from External Data
Difficulty: medium
Bloom Code: 2
The mutual funds cash/asset ratio, still used as a sentiment indicator, may not be as reliable in the future as it was in the past. Which statement identifies
a reason it is not as effective?
The public has become more aware of it.
Correct
Mutual fund managers have developed strategies using derivatives to track benchmark indexes.
There is less market participation in equity markets today than there was in the past.
Your Answer
Mutual fund managers are aware of this indicator and have developed methods for it not to be used.
Rationale
 The public has become more aware of it.
Incorrect: The public may or may not be more aware if it. This is not the reason the mutual funds cash/asset ratio is not as effective.
Rationale
 Mutual fund managers have developed strategies using derivatives to track benchmark indexes.
Correct: Investors have trillions of dollars invested in exchange-traded funds (ETFs) and mutual fund managers have developed strategies using
derivatives to track benchmark indexes. While the mutual fund cash/assets ratio could still be useful, it may not be as reliable in the future as it was
in the past.
Rationale
 There is less market participation in equity markets today than there was in the past.
Incorrect: There is likely more participation in equity markets today than in the past. This is not the reason the mutual funds cash/asset ratio is not
as effective.
Rationale
 Mutual fund managers are aware of this indicator and have developed methods for it not to be used.
Incorrect: Although mutual fund managers are aware of the indicator, it is highly unlikely that there will be a collective agreement to act together in
such a manner as to dispel the use of this indicator. This is not the reason the mutual funds cash/asset ratio is not as effective.
Question 95
Difficulty: medium
Which choice is a useful measure of market breadth?
Your Answer
Plurality Index
Advance/decline line
Absolute Breadth Index

Correct
All of the above
Rationale
 Plurality Index
Incorrect: Plurality Index is a useful measure of market breadth. It is the 25-day sum of the absolute difference between advances and declines. This
is one of other correct answers.
Rationale
 Advance/decline line
Incorrect: The advance-decline line is one of the most common and best ways of measuring breadth and internal market strength. This is one of
other correct answers.
Rationale
 Absolute Breadth Index
Incorrect: The Absolute Breadth Index is a useful measure of market breadth. It uses the absolute difference of the advances minus declines divided
by the total issued trades. This is one of other correct answers.
Rationale
 All of the above
Correct: The plurality index, advance-decline line, and absolute breadth index are all useful measures of market breadth. The plurality index
measures market breadth by taking the 25-day sum of the absolute difference between advances and declines. The advance-decline line is one of
the most common and best ways of measuring breadth and internal market strength. The absolute breadth index is also a useful measure of
market breadth. This index uses the absolute difference of the advances minus declines divided by the total issues traded, and always has a
positive number.
Question 96
Explain weighting methods used in major indexes
LOS: Explain weighting methods used in major indexes
Difficulty: easy
Bloom Code: 2
Which statement identifies a drawback associated with price-weighted indexes?
Your Answer
Price movements in small, illiquid stocks will have the same importance as the moves in larger stocks.
Correct
They are greatly affected by stock splits.
Large stock price movements overweight by two times smaller stock movements.
They affect the total number of shares traded.
Rationale
 Price movements in small, illiquid stocks will have the same importance as the moves in larger stocks.
Incorrect: Price movements in small, illiquid stocks having the same importance as larger stocks is not associated with price-weighted indexes.
Rationale
 They are greatly affected by stock splits.
Correct: A price-weighted index is greatly affected by stock splits and it also ignores market values completely.
Rationale
 Large stock price movements overweight by two times smaller stock movements.
Incorrect: Large stock price movements overweighting by two times smaller stock movements is not associated with price-weighted indexes.
Rationale
 They affect the total number of shares traded.
Incorrect: The total number of shares traded is not associated with price-weighted indexes.
Question 97
Name the two types of cycles
LOS: Name the two types of cycles
Difficulty: easy
Bloom Code: 2
Identify a type of cycle from the following options.
Your Answer
Extended cycle
Harmonic cycle
Nominal cycle
Correct
Nonlinear cycle
Rationale
 Extended cycle
Incorrect: The correct answer is nonlinear cycle.
Rationale
 Harmonic cycle
Incorrect: Harmonicity is a principle of cycles as outlined by J.M. Hurst and not a type of cycle.
Rationale
 Nominal cycle
Incorrect: Nominality is a principle of cycles as outlined by J.M. Hurst and not a type of cycle.
Rationale
 Nonlinear cycle
Correct: Nonlinear cycles, also known as sequences, are one of the two types of cycles.
Question 98
Difficulty: easy
Which statement is a basic assumption of the EMH?
Correct
Changes in market prices are random.
There are exploitable patterns in market data.
Stock market activity will not reflect all relevant factors.
There are many frictions in the market, preventing competition.
Rationale
 Changes in market prices are random.
Correct: The EMH assumes that changes in market prices are fundamentally unpredictable or random.
Rationale
 There are exploitable patterns in market data.
Incorrect: The EMH assumes that no relevant factors can be left over that might create exploitable patterns or trends in market data; otherwise they
would have been exploited already.
Rationale
 Stock market activity will not reflect all relevant factors.
Incorrect: The EMH assumes that current stock market activity will reflect all relevant factors determining value.
Rationale
 There are many frictions in the market, preventing competition.
Incorrect: The EMH assumes a frictionless competitive market with many self-interested participants.
Question 99
Difficulty: easy
Which of the following identifies a confirming indicator of a trend?
Correct
Volume
Point-and-figure charts
Theory of contrary opinion
Moving average
Rationale
 Volume
Correct. Volume, the number of shares being traded, is typically tracked alongside price and serves as a confirming indicator of a price trend.
Volume tends to expand in an uptrend and contract in a downtrend, and when price and volume diverge it may indicate a coming trend reversal.
Rationale
 Point-and-figure charts
Incorrect. Point-and-figure charts are used to study trend but do not serve as a confirming indicator of a price trend.
Rationale
 Theory of contrary opinion
Incorrect. The theory of contrary opinion is used to gauge price trends but does not serve as a confirming indicator of a price trend.
Rationale
 Moving average
Incorrect. The moving average is used to detect trends but does not serve as a confirming indicator of a price trend.
Question 100
Explain the data used in building currency charts
LOS: Explain the data used in building currency charts
Difficulty: medium
Bloom Code: 2
Which of the following describes what the closing price for a 5-minute chart of an FX pair would be?
Correct
The final bid
The central clearing house takes the average price that occurred during the last 5 minutes of the hour
As determined by the auction market
The closing price of the highest 1-minute interval that has the highest volume in the last 5 minutes of the hour
Rationale
 The final bid
Correct: Most vendors distribute bids and asks but not actual traded prices. Therefore, by convention, charts plot bids. The close would be the final
bid of a given interval.
Rationale
 The central clearing house takes the average price that occurred during the last 5 minutes of the hour
Incorrect: There are no clearing houses in FX. Because there are no clearing houses, this would not identify the closing price for a 5-minute chart of
an FX pair.
Rationale
 As determined by the auction market
Incorrect: Auction markets do not apply to FX. Because there are no auction houses in FX, this would not identify the closing price for a 5-minute
chart of an FX pair.
Rationale
 The closing price of the highest 1-minute interval that has the highest volume in the last 5 minutes of the hour
Incorrect: There is no volume reported on FX markets. Because there is no volume reported in FX markets, this would not identify the closing price
for a 5-minute chart of an FX pair.
Question 101
Difficulty: medium
Which statement describes the best action to take if the market rallies to new highs and the New Highs/New Lows declines?
Correct
Reduce long positions.
Add to long positions.
Open short positions.
Add to short positions.
Rationale
 Reduce long positions.
Correct: When prices move higher but this is not confirmed by the indicator, which is making lower highs, this is called negative divergence. It is
time to reduce long positions.
Rationale
 Add to long positions.
Incorrect: Adding to long positions when the market rallies to new highs and the New Highs/New Lows line declines indicates there is not
confirmation of the market rally.
Rationale
 Open short positions.
Incorrect: Opening short positions would not be the action to take when the market rallies to new highs and the New Highs/New Lows line declines.
No action would be taken until price confirmation. Trading signals should always come from price.
Rationale
 Add to short positions.
Incorrect: Adding to short positions would not be the action to take when the market rallies to new highs and the New Highs/New Lows line
declines. No action would be taken until price confirmation.
Question 102
Explain why technical traders are considered a specific type of noise trader
LOS: Explain why technical traders are considered a specific type of noise trader
Difficulty: easy
Bloom Code: 2
Which statement explains why the notion of trends and trend following may be the basis for a profitable investing strategy at times?
Your Answer
Some people just get lucky.

Correct
The large number of likeminded participants creates a self-fulfilling prophecy.
Technical analysis patterns are based on mathematical properties.
Fundamentals are directly responsible for all price behavior.
Rationale
 Some people just get lucky.
Incorrect: It is true that luck can play a part for many market participants; however, it is not a viable long-term strategy. This does not explain why
the notion of trends and trend following may be the basis for a profitable investing strategy at times.
Rationale
 The large number of likeminded participants creates a self-fulfilling prophecy.
Correct: If there is a large number of noise traders defined in this way, then one would expect some self-fulfilling aspect of such trading behavior.
Expecting current trends to continue could lead to a higher or lower demand for a stock than might be warranted by the fundamentals. This
characterization of a noise trader is consistent with the Shleifer model since overoptimism or overpessimism could easily result from trend
following. Such traders might even be more profitable than rational traders, at least for a while, for the reasons given in that model.
Rationale
 Technical analysis patterns are based on mathematical properties.
Incorrect: There are technical analysis patterns based on mathematical properties; however, this does not explain why the notion of trends and
trend following may be the basis for a profitable investing strategy at times.
Rationale
 Fundamentals are directly responsible for all price behavior.
Incorrect: Fundamentals are not likely responsible for all price behavior. This does not explain why the notion of trends and trend following may be
the basis for a profitable investing strategy at times.
Question 103
Difficulty: medium
Bloom Code: 1
Which statement describes how equivolume charts compare the closes from one day to another?
Correct
Color is used to compare the close one day with the close the previous day.
The closing price is displayed on the y-axis.
The closing price is displayed using a histogram on the x-axis.
Color is used when the open and close are the same value.
Rationale
 Color is used to compare the close one day with the close the previous day.
Correct. Color is used to compare the close one day with the close the previous day. Colored bars such as black or gray, allow analysts to see any
higher or lower closes for particular lengths of time for comparisons.
Rationale
 The closing price is displayed on the y-axis.
Incorrect. The closing price is not displayed on the y-axis on equivolume charts.
Rationale
 The closing price is displayed using a histogram on the x-axis.
Incorrect. The closing price is not displayed on equivolume charts.
Rationale
 Color is used when the open and close are the same value.
Incorrect. Color is not used when the open and close are the same value.
Question 104
Difficulty: medium
Which answer identifies the correct New High/New Low Index calculation if the number of stocks that reached a new high is 20, and the number of new
stocks that reached a new low is 5?
Correct
15
100
25
Rationale
 15
Correct: The New High/New Low Index is calculated as follows:
NH /NL = New Highs − New Lows = 20 − 5 = 15
Rationale
 4
Incorrect: 4 is not the correct calculation using the New High/New Low index. New high stocks reached 20 and new low stocks reached 5.
Rationale
 100
Rationale
 25
Question 105
Difficulty: medium
Identify which statement regarding RSI is not true.
Your Answer
RSI measures the speed of price change.

Correct
RSI is not useful in identifying overbought and oversold conditions.
RSI can be used to spot reversals.
RSI can help with identifying the direction of the primary trend.
Rationale
 RSI measures the speed of price change.
Incorrect: This statement is true. RSI creates a measurement between zero and 100. When RSI reaches an extreme of zero, it means the price moved
lower during all 14 periods of its calculation. When it reaches the extreme of 100, it means that price moved higher during all 14 periods.
Rationale
 RSI is not useful in identifying overbought and oversold conditions.
Correct: This statement is not true. RSI is useful in identifying overbought and oversold levels. Popular levels are above 70 (overbought) and below
30 (oversold).
Rationale
 RSI can be used to spot reversals.
Incorrect: This statement is true. A divergence between RSI and price provides a reversal signal. A bullish divergence is when RSI makes a higher low
while price makes a lower low. A bearish divergence is when RSI makes a lower high while price makes a higher high.
Rationale
 RSI can help with identifying the direction of the primary trend.
Incorrect: This statement is true. The RSI ranges can help identify the direction of the primary trend.
Question 106
Indicate how mutual fund cash and other funds measures are used to gauge sentiment
LOS: Indicate how mutual fund cash and other funds measures are used to gauge sentiment
Difficulty: medium
Bloom Code: 2
The ____________________ is less meaningful because of market changes.
Correct
mutual fund cash/asset ratio
magazine cover indicator
AAII Investor Sentiment Survey
Investors Intelligence Advisor's Sentiment Report
Rationale
 mutual fund cash/asset ratio
Correct: Market changes have made the mutual fund cash/asset ratio less meaningful in today's markets. In addition to mutual funds, investors
have trillions of dollars invested in exchange-traded funds (ETFs).
Rationale
 magazine cover indicator
Incorrect: Magazine covers as indicators are still useful today.
Rationale
 AAII Investor Sentiment Survey
Incorrect: The AAII Investment Sentiment Survey is still useful today.
Rationale
 Investors Intelligence Advisor's Sentiment Report
Incorrect: The Investors Intelligence Advisor's Sentiment Report is still useful today.
Question 107
Difficulty: medium
Bloom Code: 1
Which statement is correct regarding data intervals?
Correct
For a 6 -hour trading day, a 10-minute candle chart will produce 39 candles.
1
For a 6 -hour trading day, a 10-minute candle chart will produce 6 candles.
1
For an 8-hour trading day, a 15-minute candle chart will produce 4 candles.
For an 8-hour trading day, a 30-minute candle chart will produce 12 candles.
Rationale
 For a 6 -hour trading day, a 10-minute candle chart will produce 39 candles.
1
Correct. During a regular 6 -hour trading day on the NYSE, a 10-minute bar chart will produce 39 candles, each with four pieces of data, for a total
1
of 156 price points.
Rationale
 For a 6 -hour trading day, a 10-minute candle chart will produce 6 candles.
1
Incorrect. A 6 -hour trading day using a 10-minute candle chart would not produce 6 candles. There are four pieces of data for each candle.
1
Rationale
 For an 8-hour trading day, a 15-minute candle chart will produce 4 candles.
Incorrect. An 8-hour trading day, using a 15-minute candle chart would not produce 4 candles. There are four pieces of data for each candle.
Rationale
 For an 8-hour trading day, a 30-minute candle chart will produce 12 candles.
Incorrect. An 8-hour trading day, using a 30-minute candle chart would not produce 12 candles. There are four pieces of data for each candle.
Question 108
Difficulty: easy
Bloom Code: 1
Which statement regarding candlestick data points is correct?
Correct
A candlestick requires more data points than a bar.
A line chart of daily prices requires two data points from each day.
A line chart has more price information than a candlestick chart.
A line chart of daily prices is constructed using the mid-price of each open.
Rationale
 A candlestick requires more data points than a bar.
Rationale
 A line chart of daily prices requires two data points from each day.
Incorrect. A line chart using daily prices would not include the open price.
Rationale
 A line chart has more price information than a candlestick chart.
Incorrect. A line chart would not have as much information as a candlestick chart.
Rationale
 A line chart of daily prices is constructed using the mid-price of each open.
Incorrect. A line chart is not constructed using the mid-price of each day.
Question 109
Describe what is meant by “measures of dispersion”
LOS: Describe what is meant by “measures of dispersion”
Difficulty: easy
Bloom Code: 2
Which statement is correct regarding measures of dispersion?
Your Answer
It preserves the compound nature of investment returns.
It is useful in telling us when there is no exploitable relationship.

Correct
It measures the volatility of the return series around the average.
It is the least common application of statistics.
Rationale
 It preserves the compound nature of investment returns.
Incorrect: Measures of dispersion do not preserve the compound nature of investment returns; this refers to geometric mean. This is not a correct
statement regarding measures of dispersion.
Rationale
 It is useful in telling us when there is no exploitable relationship.
Incorrect: Measures of dispersion would not tell when there is not exploitable data. Exploratory data analysis would be better suited for that. This is
not a correct statement regarding measures of dispersion.
Rationale
 It measures the volatility of the return series around the average.
Correct: Dispersion can help us measure the risk that it missed that mark for any given year. In other words, dispersion measures the volatility of the
return series around the average. Dispersion is a critical piece of the puzzle when summarizing a dataset.
Rationale
 It is the least common application of statistics.
Incorrect: Measures of dispersion is not likely the least common application of statistics. This is not a correct statement regarding measures of
dispersion.
Question 110
Difficulty: easy
When the percentage of stocks above their 30-week moving average is higher than 70%, _________________.
Correct
the market is overbought

Your Answer
the market is oversold
it is a continuation indicator
stocks will trend sideways for some time
Rationale
 the market is overbought
Correct: When the percentage of stocks above their 30-week moving average reaches 70% or higher the market is overbought. Contrary indicator;
thus the market is overbought and ready for a correction.
Rationale
 the market is oversold
Incorrect: When the percentage of stocks above their 30-week moving average reaches 70% or higher the market is not oversold.
Rationale
 it is a continuation indicator
Incorrect: When the percentage of stocks above their 30-week moving average reaches 70% or higher, it is not a continuation indicator.
Rationale
 stocks will trend sideways for some time
Incorrect: When the percentage of stocks above their 30-week moving average reaches 70% or higher, it does not mean stocks will trend sideways.
Question 111
Difficulty: easy
Bloom Code: 1
Which location correctly describes where volume is displayed on a price chart?
Your Answer
On the right side of the chart
Above the price

Correct
At the bottom of the price chart
On top of the price data
Rationale
 On the right side of the chart
Incorrect. Volume is not normally displayed on the right side of a chart.
Rationale
 Above the price
Incorrect. Volume is not normally displayed above the price.
Rationale
 At the bottom of the price chart
Correct. Volume is commonly portrayed at the bottom of the price chart.
Rationale
 On top of the price data
Incorrect. Volume is not usually displayed on top of the price data.
Question 112
Difficulty: easy
Which answer choice describes the range of an oscillator?
Correct
Can range from 100 to –100
Determines whether a market is overbought only

Your Answer
Determines whether a market is oversold only
Are typically plotted at the top of a graph
Rationale
 Can range from 100 to –100
Correct: An oscillator will be scaled to range from 100 to –100, or 1 to –1 if it is bounded.
Rationale
 Determines whether a market is overbought only
Incorrect: An oscillator will indicate overbought and oversold conditions.
Rationale
 Determines whether a market is oversold only
Incorrect: An oscillator will indicate overbought and oversold conditions.
Rationale
 Are typically plotted at the top of a graph
Incorrect: An oscillator is typically plotted at the bottom of a graph.
Question 113
Difficulty: easy
Identify the statement that is a criticism of Dow theory.
Correct
An investor will act late at market tops and bottoms.
The different trends are too strictly defined.
Dow theory is not specific enough about the requirements needed to identify a change in trend.
An investor will act late at market tops and early at market bottoms.
Rationale
 An investor will act late at market tops and bottoms.
Correct. One criticism of Dow theory is that it will result in an investor acting after rather than before at market tops and bottoms.
Rationale
 The different trends are too strictly defined.
Incorrect. One of the criticisms of Dow Theory is that the different trends are not strictly defined.
Rationale
 Dow theory is not specific enough about the requirements needed to identify a change in trend.
Incorrect. One of the criticisms of Dow theory is that it is too specific about the requirements needed to identify a change in trend.
Rationale
 An investor will act late at market tops and early at market bottoms.
Incorrect. Criticisms of Dow theory do not include investors acting early at market bottoms.
Question 114
Difficulty: medium
Which statement applies when the averages are reaching new price highs and volume is not?
Correct
A negative divergence has occurred.
The uptrend will continue.
Confirmation has occurred.
The new price high is occurring on more enthusiasm.
Rationale
 A negative divergence has occurred.
Correct: A negative divergence has occurred and should warn the trader that the new price high is occurring on less enthusiasm, as measured by
volume, and that the uptrend may soon be ending.
Rationale
 The uptrend will continue.
Incorrect: When the averages are reaching new price highs on lower volume it does not indicate the uptrend will continue.
Rationale
 Confirmation has occurred.
Incorrect: When the averages are reaching new price highs on lower volume it does not indicate a confirmation.
Rationale
 The new price high is occurring on more enthusiasm.
Incorrect: When the averages are reaching new price highs on lower volume it does not indicate enthusiasm is increasing.
Question 115
Difficulty: medium
Which action should a trader take when the New High/New Low Index rises while the broader market remains flat?
Correct
Take profits on short positions.
Take profits on long positions.
Stay on the sidelines.
Go short.
Rationale
 Take profits on short positions.
Correct: When the New High/New Low Index rises when the broader market stays flat, this is a bullish (buy) signal and short positions should be
closed out.
Rationale
 Take profits on long positions.
Incorrect: Taking profits on long positions would not be the action a trader should take when the New High/New Low Index rises while the broader
market remains flat.
Rationale
 Stay on the sidelines.
Incorrect: Staying on the sidelines would not be the action a trader should take when the New High/New Low Index rises while the broader market
remains flat.
Rationale
 Go short.
Incorrect: Going short would not be the action a trader should take when the New High/New Low Index rises while the broader market remains flat.
Question 116
Difficulty: medium
Which answer would the advance/decline be closest to if 4,500 stocks were traded, 1,500 advanced, 2,500 declined, and 500 were unchanged at the
close?
Correct
–1,000
1,000
1.67
0.60
Rationale
 –1,000
Correct: The advance/decline line takes the number of advancing stocks, subtracts the number of declining stocks, and ignores unchanged stocks.
−1, 000 = 1, 500 − 2, 500
Rationale
 1,000
Incorrect: The advance/decline line takes the number of advancing stocks, subtracts the number of declining stocks, and ignores unchanged
stocks.
Rationale
 1.67
stocks.
Rationale
 0.60
stocks.
Question 117
Difficulty: easy
Identify the correct statement, according to Dow theory, regarding volume.
Correct
Volume cannot signal a trend reversal.
Volume is a primary confirmation of trend.
Volume overrides confirmation but not price trend.
Volume overrides price trend but not confirmation.
Rationale
 Volume cannot signal a trend reversal.
Correct. Volume is a secondary confirmation of trend and cannot signal a trend reversal.
Rationale
 Volume is a primary confirmation of trend.
Incorrect. Volume is not a secondary confirmation of trend.
Rationale
 Volume overrides confirmation but not price trend.
Incorrect. Volume does not override confirmation. Price is always the most important.
Rationale
 Volume overrides price trend but not confirmation.
Incorrect. Volume does not override price. Price is always the most important.
Question 118
Review differences between exchange‐traded funds (ETFs) and exchange‐traded notes (ETNs)
LOS: Review differences between exchange‐traded funds (ETFs) and exchange‐traded notes (ETNs)
Difficulty: easy
Bloom Code: 2
Which of the following is one difference between ETFs and ETNs?
Your Answer
Reduced transaction cost
Favorable tax treatment
More frequent NAV updates in ETFs than in ETNs

Correct
ETFs offer ownership in their underlying assets while ETNs offer ownership of shares in a bond backed by the assets
Rationale
 Reduced transaction cost
Incorrect: Both instruments offer reduced transaction cost in comparison to conventional non-listed mutual funds.
Rationale
 Favorable tax treatment
Incorrect: Both instruments receive the same tax treatment.
Rationale
 More frequent NAV updates in ETFs than in ETNs
Incorrect: The value of both ETFs and ETNs is the last printed price.
Rationale
 ETFs offer ownership in their underlying assets while ETNs offer ownership of shares in a bond backed by the assets
Correct: The major difference between exchange-traded funds (ETFs) and exchange-traded notes (ETNs) is what the fund and the investors actually
own. ETFs own the underlying assets and investors own shares in that ownership. ETNs are structured products that are issued as senior debt
notes. The holder of an ETN owns shares in a bond backed by those assets.
Question 119
Difficulty: easy
Select the description that is the best definition of a trend.
Your Answer
Price oscillations as they move toward a theoretical equilibrium.

Correct
A directional movement of prices that remains in effect long enough to be identifiable and still profitable.
When there are more buyers than sellers or more sellers than buyers, prices will tend to travel in one direction for a period of time or trend.
Changes in supply and demand over time.
Rationale
 Price oscillations as they move toward a theoretical equilibrium.
Incorrect. Price oscillations moving toward a theoretical equilibrium is not the best definition of a trend. Equilibrium suggests buyers and sellers are
matched; trending prices will have an imbalance.
Rationale
 A directional movement of prices that remains in effect long enough to be identifiable and still profitable.
Correct. When prices are trending, they are headed in one direction long enough for it to be recognizable and for there to be an opportunity for a
skilled trader to profit from it.
Rationale
 When there are more buyers than sellers or more sellers than buyers, prices will tend to travel in one direction for a period of time or
trend.
Incorrect. There being more buyers than sellers or more sellers than buyers and price tending to travel in one direction for a period of time or trend
is not the best definition of a trend.
Rationale
 Changes in supply and demand over time.
Incorrect. Price in just about any market is the result of supply and demand at that instant of time. Prices do change because of fluctuations in
supply and demand. However, changes in supply and demand over time is not the best definition of a trend.
Question 120
Difficulty: medium
Prior to the start of a new bull market, which statement describes the prevailing sentiment?
Your Answer
Skepticism
Optimism
Euphoria
Correct
Pessimism
Rationale
 Skepticism
Incorrect: Skepticism happens early in a bull market when the majority still believe the bear market is in effect and that the reversal is only a
reaction in the ongoing bear trend.
Rationale
 Optimism
Incorrect: Optimism happens as the bull market matures, when more and more people agree that a bull market is in progress.
Rationale
 Euphoria
Incorrect: Euphoria happens when a bull market is mature. Outsiders believe the trend will go on forever and most are now fully invested in the
market.
Rationale
 Pessimism
Correct: According to Sir John Templeton, bull markets are born of pessimism.
Question 121
Difficulty: medium
Which description identifies the result of increasing optimism and confidence in the stock market?
Correct
Rising liquidity
Falling liquidity
Higher bond yields
Disequilibrium between supply and demand
Rationale
 Rising liquidity
Correct: As more people become optimistic that stock prices tomorrow will be higher than they are today, they enter the market, meaning that
liquidity rises.
Rationale
 Falling liquidity
Incorrect: Falling liquidity would not be the result of increasing optimism and confidence in the stock market. Falling liquidity is likely an indication
of decreasing optimism and potentially lack of confidence prices will continue higher.
Rationale
 Higher bond yields
Incorrect: Bond prices move inversely to stock prices. When stock prices rise due to increasing optimism, bond prices will likely fall, resulting in
higher bond yields.
Rationale
 Disequilibrium between supply and demand
Incorrect: As prices rise, more buyers want to buy at higher prices. But there must also be sellers available to sell to them at those prices.
Question 122
Difficulty: easy
Bloom Code: 2
The vast majority of professional money managers are actively involved with some form of technical analysis. Which statement identifies what this runs
counter to?
Your Answer
The notion of a momentum strategy
Behavioral finance theory
The Capital Allocation Pricing Model

Correct
Efficient Markets Hypothesis
Rationale
 The notion of a momentum strategy
Incorrect: The vast majority of professional money managers being actively involved in some form of technical trading does not run counter to the
notion of momentum strategies.
Rationale
 Behavioral finance theory
Incorrect: The vast majority of professional money managers being actively involved in some form of technical trading does not run counter to
behavioral finance theory.
Rationale
 The Capital Allocation Pricing Model
Incorrect: The vast majority of professional money managers being actively involved in some form of technical trading does not run counter to the
Capital Allocation Pricing Model.
Rationale
 Efficient Markets Hypothesis
Correct: Large amounts of money are invested in hedge fund pools and other types of professional trading groups, where the vast majority are
actively involved in some form of technical trading. This runs counter to the EMH, which says that technical analysis activity represents wasted
motion and wasted money.
Question 123
Difficulty: medium
Which term is not a measurement of market strength?
Your Answer
Advance/decline line
NH/NL index
Correct
The Sharpe Ratio
Stochastic oscillator
Rationale
 Advance/decline line
Incorrect: This momentum oscillator measures market strength by calculating whether buyers or sellers determined the price movement for a
single day. It then averages a series of A/D days and expresses that as a moving average.
Rationale
 NH/NL index
Incorrect: The NH/NL line measures market strength. It calculates stocks that reach their highest level in a year on a given day and subtracts that
number from stocks that fall to their lowest point for that year on the same day.
Rationale
 The Sharpe Ratio
Correct: This is a measurement of portfolio performance.
Rationale
 Stochastic oscillator
Incorrect: George C. Lane, the creator of this oscillator, describes this indicator as one that does not track price or volume. It calculates the
momentum of price movement. The idea underlying the stochastic oscillator is that prices tend to close near their highs in up-trending markets and
near their lows in down-trending markets.
Question 124
Difficulty: medium
Bloom Code: 1
Which statement is correct in regard to bar charts?
In a daily bar chart, the length of the bar indicates the opening and closing prices for the day.
Correct
A bar chart may sometimes contain less information that a candlestick chart.
A tick mark on the left side of the bar denotes the closing price for the day.
A daily bar chart is constructed using up to five prices of the trading day.
Rationale
 In a daily bar chart, the length of the bar indicates the opening and closing prices for the day.
Incorrect. The open and closing prices on a bar chart are not found from the length of the bar.
Rationale
 A bar chart may sometimes contain less information that a candlestick chart.
Rationale
 A tick mark on the left side of the bar denotes the closing price for the day.
Incorrect. A tick mark on the left side of a bar chart does not denote the closing price for the day.
Rationale
 A daily bar chart is constructed using up to five prices of the trading day.
Incorrect. Daily bar charts would not be constructed using up to five prices of the trading day.
Question 125
Difficulty: easy
Which of the following is an argument for the non-randomness of prices?
Efficient Market Theory
Your Answer
Probability Theory
Alexander's Filter Technique

Correct
People's memories
Rationale
 Efficient Market Theory
Incorrect: The EMH provides an argument for the randomness of prices, not for their non-randomness.
Rationale
 Probability Theory
Incorrect: The concept of probability theory is directly related to the concept of randomness; it is not an argument for non-randomness.
Rationale
 Alexander's Filter Technique
Incorrect: Alexander's Filter Technique is a mechanical trading rule which allows traders to set rules for when to buy and sell a security based on
that security's percentage price change from previous highs and lows. It is at its core a test of whether prices move in trends. An evaluation of this
trading rule by Andrew Lo found returns to be inferior to those from a buy-and-hold strategy. Alexander's Filter Technique is not an argument for
non-randomness.
Rationale
 People's memories
Correct: People have memories of past prices. It is these memories that help to create support and resistance levels. Market participants use
memories of past prices to influence decisions about present and future purchases and sales of securities.
Question 126
Discuss left and right translation
LOS: Discuss left and right translation
Difficulty: easy
Bloom Code: 2
Select the answer that best describes right translation
When two different cycles bottom at the same time
Your Answer
When a larger cycle bottoms after a smaller cycle

Correct
A cycle in which prices are bottoming later than expectations
A cycle in which prices bottom earlier than expectations
Rationale
 When two different cycles bottom at the same time
Incorrect: A cycle that is right translated implies prices are bottoming later than expectations.
Rationale
 When a larger cycle bottoms after a smaller cycle
Incorrect: A cycle that is right translated implies prices are bottoming later than expectations.
Rationale
 A cycle in which prices are bottoming later than expectations
Correct: A cycle that is right translated implies prices are bottoming later than expectations.
Rationale
 A cycle in which prices bottom earlier than expectations
Incorrect: This defines left translation.
Question 127
Name four asset classes amenable to technical analysis
LOS: Name four asset classes amenable to technical analysis
Difficulty: easy
Bloom Code: 2
Which asset class is amenable to technical analysis?
Venture capital funds
Correct
Short-term interest rates

Your Answer
PNLRs (public non-listed REITs)
Private placement funds
Rationale
 Venture capital funds
Incorrect: The venture capital funds class is not amenable to technical analysis. It is in the private sector.
Rationale
 Short-term interest rates
Correct: Short-term interest rates are included in the bonds asset class and therefore would be amenable to technical analysis.
Rationale
 PNLRs (public non-listed REITs)
Incorrect: Non-listed REITs are not publicly traded and would not be amenable to technical analysis.
Rationale
 Private placement funds
Incorrect: Private placement funds are not publicly traded and would not be amenable to technical analysis.
Question 128
Difficulty: easy
Bloom Code: 1
Which statement regarding candlesticks is most correct?
A candlestick can be drawn only for daily price intervals.
Correct
Compared to a bar chart of daily prices, the candlestick chart provides a more nuanced display of the price action for that day.
A candlestick chart cannot be used to chart intraday price action.
The four key prices in a trading day are bid-mid-offer-close.
Rationale
 A candlestick can be drawn only for daily price intervals.
Incorrect. A candlestick chart can be drawn for all time intervals.
Rationale
 Compared to a bar chart of daily prices, the candlestick chart provides a more nuanced display of the price action for that day.
Correct. The candlestick chart provides a more nuanced display of four key prices for a trading day, often making it easier for a trader to spot
patterns and see changes in trends more quickly.
Rationale
 A candlestick chart cannot be used to chart intraday price action.
Incorrect. Candlestick charts can be used on all time intervals, including intraday price action.
Rationale
 The four key prices in a trading day are bid-mid-offer-close.
Incorrect. Bid-mid-offer-close are not the four key prices in a trading day.
Question 129
Difficulty: easy
Which statement is a defining element of Dow theory?
Correct
Prices trend.
Your Answer
Prices do not trend.
Markets are irrational.
Markets are efficient.
Rationale
 Prices trend.
Correct. That prices trend is a defining element of Dow theory. In the January 4, 1902, edition of the Wall Street Journal, Dow wrote that when price
made successive highs or alternatively successive lows, this was an indication of a trend.
Rationale
 Prices do not trend.
Incorrect. Prices not trending is not a core concept of Dow theory.
Rationale
 Markets are irrational.
Incorrect. That markets are irrational is an assumption underlying technical analysis, but it is not the core concept of Dow theory.
Rationale
 Markets are efficient.
Incorrect. Markets being efficient is a contradiction of the underlying assumptions of Dow theory and is not a defining element of Dow theory.
Question 130
Discuss the importance of the “crowd”
LOS: Discuss the importance of the “crowd”
Difficulty: medium
Bloom Code: 2
New investment capital will __________ at extreme market highs when sentiment is at a peak.
Your Answer
stay level
increase rapidly
Correct
decrease
increase gradually
Rationale
 stay level
Incorrect: New investment capital does not generally stay level at extreme market highs with sentiment at a peak.
Rationale
 increase rapidly
Incorrect: New investment capital does not generally increase rapidly at extreme market highs with sentiment at a peak.
Rationale
 decrease
Correct: At extreme highs, the market in effect runs out of buyers. In other words, as the crowd becomes increasingly bullish and commits more and
more funds to the market, the supply of new investment capital decreases. Eventually, when it seems as if everyone in the crowd is bullish, the
market tops.
Rationale
 increase gradually
Incorrect: This is a point at which there is unprecedented participation among the public in this market; it's highly unlikely that there will be a
gradual increase of new investment capital.
Question 131
Difficulty: easy
Which is the correct number of phases in a primary bull or bear trend?
Correct
Rationale
 3
Correct. There are three phases in a primary bull or bear market.
Rationale
 4
Incorrect. There are not four phases in a primary bull or bear trend.
Rationale
 5
Incorrect. There are not five phases in a primary bull or bear trend.
Rationale
 6
Incorrect. There are not six phases in a primary bull or bear trend.
Question 132
Difficulty: easy
Bloom Code: 1
Which statement describes how line charts are often used?
Line charts are used to spot trading range periods.
Your Answer
Line charts are used to plot opening prices.

Correct
Line charts are often used to track long-run trends in data.
Line charts can be used for trade management.
Rationale
 Line charts are used to spot trading range periods.
Incorrect. Line charts are not usually used to identify trading ranges.
Rationale
 Line charts are used to plot opening prices.
Incorrect. Opening prices are not used in the construction of line charts.
Rationale
 Line charts are often used to track long-run trends in data.
Correct. Line charts are often used to track long-run trends in data.
Rationale
 Line charts can be used for trade management.
Incorrect. Methods other than line charts are used for trade management.
Question 133
List five tradeable instruments that a technician is likely to employ
LOS: List five tradeable instruments that a technician is likely to employ
Difficulty: medium
Bloom Code: 1
A basket of underlying assets (exchange-traded products or ETPs) trading as a unit is defined as
Correct
a tradeable instrument.
Your Answer
a non-tradable instrument.
not amenable to technical analysis.
an asset class.
Rationale
 a tradeable instrument.
Correct: ETP, a basket of underlying assets trading as a unit, is a tradeable instrument that a technician is likely to employ.
Rationale
 a non-tradable instrument.
Incorrect: ETPs are not non-tradable instruments.
Rationale
 not amenable to technical analysis.
Incorrect: ETPs are amenable to technical analysis.
Rationale
 an asset class.
Incorrect: ETPs are not defined as one of the four major types of asset classes.
Question 134
List the major terms of an option contract
LOS: List the major terms of an option contract
Difficulty: easy
Bloom Code: 2
A ___________ gives the holder the right, but not the obligation, to sell a defined amount of the underlying security at a certain price at or by a certain
date.
Correct
put option
short call option
options writer
call option
Rationale
 put option
Correct: Put options give the holder the right, but not the obligation, to sell a defined amount of the underlying security at a certain price at or by a
certain date.
Rationale
 short call option
Incorrect: A short call option is not described as giving the holder the right, but not the obligation, to sell a defined amount of the underlying
security at a certain price at or by a certain date.
Rationale
 options writer
Incorrect: An options writer is not described as giving the holder the right, but not the obligation, to sell a defined amount of the underlying security
at a certain price at or by a certain date.
Rationale
 call option
Incorrect: A call option is not described as giving the holder the right, but not the obligation, to sell a defined amount of the underlying security at a
certain price at or by a certain date.
Question 135
List the major types of issuers of debt securities
LOS: List the major types of issuers of debt securities
Difficulty: easy
Bloom Code: 2
Which statement identifies a reason a sovereign government would issue a bond in lieu of going to a bank or financial institution?
Your Answer
The influence of the bank's shareholders on the government
The laborious application process
A conflict of interest
Correct
The amount the government wants to raise can be far greater than the lending capacity of a single bank
Rationale
 The influence of the bank's shareholders on the government
Incorrect: The influence of a bank's shareholders on the government would not likely be a reason a sovereign government would issue a bond in
lieu of going to a bank or financial institution.
Rationale
 The laborious application process
Incorrect: The laborious application process would not likely be a reason a sovereign government would issue a bond in lieu of going to a bank or
financial institution.
Rationale
 A conflict of interest
Incorrect: A conflict of interest would not likely be a reason a sovereign government would issue a bond in lieu of going to a bank or financial
institution.
Rationale
 The amount the government wants to raise can be far greater than the lending capacity of a single bank
Correct: Most likely, a bank or financial institution cannot or will not lend the government the amount needed or will not make the loan at an
acceptable interest rate. In the case of a sovereign government, the amount of a loan could be in the hundreds of millions of dollars or other
currency, far greater than the lending capacity of a single lender.
Question 136
Difficulty: easy
Bloom Code: 2
Which of the following describes the term out-of-the-money?
Your Answer
A call option with a strike price below the price of the underlying
A put option with a strike price above the price of the underlying
An option with a strike price at the price of the underlying

Correct
A call option with the strike price above the price of the underlying
Rationale
 A call option with a strike price below the price of the underlying
Incorrect: A call option with a strike price below the price of the underlying would be in-the-money, not out-of-the-money.
Rationale
 A put option with a strike price above the price of the underlying
Incorrect: A put option with a strike price above the price of the underlying would be in-the-money, not out-of-the-money.
Rationale
 An option with a strike price at the price of the underlying
Incorrect: A call or put option with a strike price at the price of the underlying would be at-the-money, not out-of-the-money.
Rationale
 A call option with the strike price above the price of the underlying
Correct: Out-of-the-money options are a call option with a strike price above the price of the underlying, or a put option with a strike price below
the price of the underlying.
Question 137
Difficulty: easy
______________ is at the core of the idea that price patterns are exploitable.
The efficient market hypothesis
Correct
Dow theory
Random walk
Your Answer
Probability theory
Rationale
 The efficient market hypothesis
Incorrect: The proponents of the efficient market hypothesis reject out of hand the possibility of exploitable price pattern in historical price data.
The EMH is not at the core of the idea that price patterns are exploitable.
Rationale
 Dow theory
Correct: Dow theory is largely considered to be the foundation of technical analysis. The underlying idea is that human psychology has an effect on
market prices that is discernible in exploitable price patterns.
Rationale
 Random walk
Incorrect: Proponents of random walk theory believe that prices are unpredictable. Random walk is not at the core of the idea that price patterns
are exploitable.
Rationale
 Probability theory
Incorrect: The concept of randomness is related to probability theory. Probability theory is not at the core of the idea that price patterns are
exploitable.
Question 138
Difficulty: medium
Which statement describes the phenomenon of an intraday trader and a long-term investor observing the same market trend at different time periods?
Correct
Patterns are fractal.
Prices trend.
Your Answer
The interaction of supply and demand determines price.
Rationale
 Patterns are fractal.
Correct. The trading markets are similar in that any period we look at—short, long, or medium—produces trends with the same characteristics and
patterns.
Rationale
 Prices trend.
Incorrect. Prices do trend, but that does not describe the phenomenon of different time periods exhibiting the same market trend.
Rationale
Incorrect. Price discounting everything does not describe the phenomenon of different time periods exhibiting the same market trend.
Rationale
 The interaction of supply and demand determines price.
Incorrect. The interaction of supply and demand determining price does not describe the phenomenon of different time periods exhibiting the
same market trend.
Question 139
Difficulty: medium
Bloom Code: 2
____________ can be seen when a sharp price rise over several days occurs and fundamentals have not changed to trigger a price move.
Correct
Herd behavior
Unsound investment
The bursting of the market bubble
A contraction cycle
Rationale
 Herd behavior
Correct: Herd instinct models are motivated by observing financial market booms and busts. They are typically highly aggregative, and the herd
behavior is usually summarized by a single-agent model representing the herd. Market practitioners have observed cycles in financial markets that
are often described as a “feeding frenzy.” The price of a particular asset begins to rise and then develops a momentum of its own, seemingly
independent of any real fundamental change in the things that should determine its price.
Rationale
 Unsound investment
Incorrect: Unsound investment does not describe the term for sharp price rises with no change in fundamentals to trigger a price rise.
Rationale
 The bursting of the market bubble
Incorrect: The bursting of a market bubble does not describe the term for sharp price rises with no change in fundamentals to trigger a price rise.
Rationale
 A contraction cycle
Incorrect: A contraction cycle does not describe the term for sharp price rises with no change in fundamentals to trigger a price rise.
Question 140
Difficulty: hard
Bloom Code: 1
Bar, line, and candlestick charts, whether arithmetic or logarithmic scales, portray___________on the ___________ and price on the ______________.
Your Answer
volume/left side/right side

Correct
time/horizontal axis/vertical axis
time/vertical axis/horizontal axis
price/vertical axis/horizontal axis
Rationale
 volume/left side/right side
Incorrect. Volume is not displayed on the left side.
Rationale
 time/horizontal axis/vertical axis
Correct. The line, bar, and candlestick charts all portray time on the horizontal axis and price on the vertical axis, whether it is an arithmetic or
logarithmic scale.
Rationale
 time/vertical axis/horizontal axis
Incorrect. Time is not displayed on the vertical axis and price is not displayed on the horizontal axis.
Rationale
 price/vertical axis/horizontal axis
Incorrect. Price would not be displayed on both the vertical and horizontal axis using a regular bar, line, and candlestick chart.
Question 141
Difficulty: medium
Which description regarding the New High/New Low (NH/NL) index is correct?
Correct
It is a leading indicator of the stock market.
It is a lagging indicator of the stock market.
It is a coincident indicator of the stock market.
It is not a trend-following indicator.
Rationale
 It is a leading indicator of the stock market.
Correct: According to Dr. Alexander Elder, the NH/NL index is the best leading indicator of the stock market. The NH/NL index tracks the behavior of
stock market leaders on a daily basis by subtracting stocks that fall to their lowest point for the year from stocks that rise to their highest point for
the year.
Rationale
 It is a lagging indicator of the stock market.
Incorrect: The NH/NL index is not a lagging indicator of the stock market.
Rationale
 It is a coincident indicator of the stock market.
Incorrect: The NH/NL index is not a coincident indicator of the stock market.
Rationale
 It is not a trend-following indicator.
Incorrect: When the market rises and the NH/NL index line also rises, it confirms uptrends. When the NH/NL line declines together with the market,
it confirms the downtrend.
Question 142
Difficulty: medium
Which of the following is another term for frequency distribution.
Your Answer
Equilibrium
Geometric mean
Correct
Histogram
Moving average
Rationale
 Equilibrium
Incorrect. Equilibrium for our purposes is a balance between buyers and sellers. It is the price at which everyone is willing to trade.
Rationale
 Geometric mean
Incorrect. Geometric mean is a measure of central tendency and is used to find an average across items that have different scales.
Rationale
 Histogram
Correct. A frequency distribution is also a histogram. It is a way of charting and displaying the frequency of values in a data set.
Rationale
 Moving average
Incorrect. A moving average averages a fixed number of periods; the oldest value is dropped off and a new value is added so the average advances.
Question 143
Name four asset classes amenable to technical analysis
LOS: Name four asset classes amenable to technical analysis
Difficulty: easy
Bloom Code: 2
An index is one of the five major tradable instruments. Using the four major types of asset classes, which answer choice identifies the one least likely to
be traded within an index?
Stocks
Your Answer
Bonds
Correct
Currencies
Commodities
Rationale
 Stocks
Incorrect: Stocks, an asset class, are traded within the major indexes such as Dow Jones Industrial Average, S&P 500, and the NASDAQ. Stocks are
not the least likely to be traded within an index.
Rationale
 Bonds
Incorrect: Bonds are an asset class and are not the least likely to be traded within an index.
Rationale
 Currencies
Correct: Currencies, an asset class, are the least likely to be traded within an index. There are some trading vehicles available for currencies,
however, such as ETFs. The Forex market is also a widely traded currency market.
Rationale
 Commodities
Incorrect: Commodities, an asset class, are widely traded within an index as underlying stocks and ETFs, and are not the least likely to be traded
within an index.
Question 144
Difficulty: medium
In Elliott Wave, which wave always travels against the larger trend?
Correct
Flat
Motive
Impulse
Diagonal
Rationale
 Flat
Correct. A flat is a corrective wave. Corrective waves travel against the trend of one degree larger.
Rationale
 Motive
Incorrect. Motive waves always move in the same direction as the trend of one larger degree.
Rationale
 Impulse
Incorrect. An impulse wave is a type of motive wave.
Rationale
 Diagonal
Incorrect. A diagonal is a type of motive wave.
Question 145
Difficulty: medium
Bloom Code: 1
Choose the statement that describes how a floor trader of a stock exchange might use charts.
Correct
Floor traders might notice that demand for a stock was increasing and use a chart to validate their intuition for higher prices.
Floor traders use charts for easier record keeping.
Floor traders execute orders only and do not depend on charts.
Floor traders help to chart the prices of stocks for clients.
Rationale
 Floor traders might notice that demand for a stock was increasing and use a chart to validate their intuition for higher prices.
Correct. A floor trader could use price charts to validate the intuition of price movement they get from being on the floor. It gives them a way to
communicate this dynamism to others who are not present at the exchange.
Rationale
 Floor traders use charts for easier record keeping.
Incorrect. A floor trader would not use price charts for easier record keeping.
Rationale
 Floor traders execute orders only and do not depend on charts.
Incorrect. Floor traders often utilize price charts.
Rationale
 Floor traders help to chart the prices of stocks for clients.
Incorrect. Floor traders most likely do not chart the prices themselves, but rely on computer-generated charts
Question 146
Difficulty: easy
Which statement regarding basic strategies of technical analysis is not included in these strategies listed?
Correct
“Market prices are efficient; thus investors cannot outperform the market.”
“The trend is your friend.”
“Don't lose.”
“Manage your money.”
Rationale
 “Market prices are efficient; thus investors cannot outperform the market.”
Correct. “Market prices are efficient; thus investors cannot outperform the market” is not a basic strategy of technical analysis.
Rationale
 “The trend is your friend.”
Incorrect. “The trend is your friend” is an old adage known to almost all traders. It is a basic strategy of technical analysis.
Rationale
 “Don't lose.”
Incorrect. “Don't lose” is one of the basic strategies of technical analysis. Warren Buffett's number-one rule is “Don't lose money.”
Rationale
 “Manage your money.”
Incorrect. “Manage your money” is one of the basic strategies of technical analysis.
Question 147
Difficulty: medium
Bloom Code: 2
Which of the following describes an option that is in-the-money?
Your Answer
A call option with a strike price above the price of the underlying
Correct
A put option with a strike price above the price of the underlying
A put option with a strike price below the price of the underlying
An option with a strike price at or very close to the price of the underlying
Rationale
 A call option with a strike price above the price of the underlying
Incorrect: A call option with a strike price above the underlying would be out-of-the-money, not in-the-money.
Rationale
 A put option with a strike price above the price of the underlying
Correct: In-the-money is a call option with a strike price below the price of the underlying, or a put option with a strike price above the price of the
underlying.
Rationale
 A put option with a strike price below the price of the underlying
Incorrect: A put option with a strike price below the price of the underlying would be out-of-the-money, not in-the-money.
Rationale
 An option with a strike price at or very close to the price of the underlying
Incorrect: An option with a strike price at or very close to the price of the underlying is at-the-money, not in-the-money.
Question 148
Identify skew and kurtosis
LOS: Identify skew and kurtosis
Difficulty: easy
Bloom Code: 2
_____________ is a statistic that describes the way a probability distribution looks, and displays the degree to which returns are asymmetric around the
mean.
Your Answer
A bell curve
Binomial distribution
Identical distribution
Correct
Skewness
Rationale
 A bell curve
Incorrect: Although a bell curve does describe the way a distribution looks, it doesn't display the degree to which returns are asymmetric around
the mean.
Rationale
 Binomial distribution
Incorrect: Binomial distribution is used to measure probabilities of events with two distinct outcomes, such as both wins and losses in a trading
strategy. It does not display the degree to which returns are asymmetric around the mean.
Rationale
 Identical distribution
Incorrect: Identical distribution are variables with the same probability distribution. It does not display the degree to which returns are asymmetric
around the mean.
Rationale
 Skewness
Correct: Skewness is a statistic that describes the way a probability distribution looks. It displays the degree to which returns are asymmetric
around the mean.
Question 149
Describe “the Greeks”
LOS: Describe “the Greeks”
Difficulty: easy
Bloom Code: 2
The derivative vega ____________________.
measures the rate of change in delta
Your Answer
is a derivative of time
measures the rate of time-value decay

Correct
measures the risk of changes in implied volatility
Rationale
 measures the rate of change in delta
Incorrect: The derivative vega does not measure the rate of change in delta.
Rationale
 is a derivative of time
Incorrect: The derivative vega is not a derivative of time.
Rationale
 measures the rate of time-value decay
Incorrect: The derivative vega does not measure the rate of time-value decay.
Rationale
 measures the risk of changes in implied volatility
Correct: Vega measures the risk of changes in implied volatility. Higher volatility makes options more expensive.
Question 150
Difficulty: medium
Which statement is most correct if a new low in the stock market is accompanied by a new low of the A/D line?
Correct
The decline is likely to continue.
Stocks will reverse and move higher.

Your Answer
Fewer stocks are participating in the decline.
The bear move is nearing an end.
Rationale
 The decline is likely to continue.
Correct: When a new low in the stock market is accompanied by a new low in the A/D line, it shows that the decline has broad support and is likely
to continue. Broad-based declines have greater staying power.
Rationale
 Stocks will reverse and move higher.
Incorrect: When a new low in stocks is accompanied by a new low of the A/D line, it is not giving a bullish indication.
Rationale
 Fewer stocks are participating in the decline.
Incorrect: When a new low in stocks is accompanied by a new low of the A/D line, it does not indicate that fewer stocks are participating in the
decline.
Rationale
 The bear move is nearing an end.
Incorrect: When a new low in stocks is accompanied by a new low of the A/D line, it is not indicating that a bear move is nearing an end.
Question 151
Difficulty: easy
What do breadth indicators measure to identify trader participation in a market?
Correct
Price
Volume
Value
The A/D indicator
Rationale
 Price
Correct: A breadth indicator measures advances and declines in price to identify participation among traders in a specific issue or in the market in
general.
Rationale
 Volume
Incorrect: Breadth indicators do not measure volume to identify trader participation in a market.
Rationale
 Value
Incorrect: Breadth indicators do not measure value to identify trader participation in a market.
Rationale
 The A/D indicator
Incorrect: Breadth indicators do not measure the A/D indicator to identify trader participation in a market. The A/D is a breadth indicator.
Question 152
Explain the concept of contrary opinion
LOS: Explain the concept of contrary opinion
Difficulty: easy
Bloom Code: 2
Which statement is correct regarding the concept of contrary opinion?
Your Answer
It always pays to be a contrarian.
It is helpful to use sentiment readings daily.
It is best to go against the professional consensus.

Correct
It is profitable to take a position contrary to the crowd at extremes.
Rationale
 It always pays to be a contrarian.
Incorrect: The statement it always pays to be a contrarian is only true at market tops and bottoms when it is accompanied with extreme sentiment
readings.
Rationale
 It is helpful to use sentiment readings daily.
Incorrect: Sentiment readings do not always provide extreme readings. They will be the most helpful when there are bullish or bearish sentiment
extremes.
Rationale
 It is best to go against the professional consensus.
Incorrect: Trends take time to reverse, and during trends professionals and even a great percentage of the “crowd” will be on the right direction of
the market. Professional newsletter writers are often on the wrong side of sentiment, which is why using sentiment reports such as AAII can be
useful.
Rationale
 It is profitable to take a position contrary to the crowd at extremes.
Correct: According to Humphrey Neill, it is profitable to take a position contrary to the crowd at extremes.
Question 153
Explain why technical traders are considered a specific type of noise trader
LOS: Explain why technical traders are considered a specific type of noise trader
Difficulty: medium
Bloom Code: 2
What describes, from the perspective of the efficient market hypothesis (EMH), what technical traders are?
Your Answer
Mean reversion traders
A cross between fundamental and technical traders

Correct
A specific type of noise trader
Systematic traders
Rationale
 Mean reversion traders
Incorrect: Technical traders are not mean-reversion traders from the perspective of EMH.
Rationale
 A cross between fundamental and technical traders
Incorrect: Technical traders are not a cross between fundamental and technical traders from the perspective of EMH.
Rationale
 A specific type of noise trader
Correct: Since technical traders are not rational traders in the sense of the EMH, they can instead be thought of as a specific type of noise trader.
Rationale
 Systematic traders
Incorrect: Technical traders are not systematic traders from the perspective of EMH.
Question 154
Explain weighting methods used in major indexes
LOS: Explain weighting methods used in major indexes
Difficulty: easy
Bloom Code: 2
Which of the following identifies the index that has a drawback because the movements of small illiquid stocks carry the same importance as those of
large liquid stocks?
Price-weighted
Your Answer
Modified capitalization–weighted
Value-weighted
Correct
Unweighted
Rationale
 Price-weighted
Incorrect: A price-weighted index does not have the drawback of the movements of small illiquid stocks carrying the same importance as those of
large liquid stocks.
Rationale
 Modified capitalization–weighted
Incorrect: A modified capitalization–weighted index does not have the drawback of the movements of small illiquid stocks carrying the same
importance as those of large liquid stocks.
Rationale
 Value-weighted
Incorrect: A value-weighted index does not have the drawback of the movements of small illiquid stocks carrying the same importance as those of
large liquid stocks.
Rationale
 Unweighted
Correct: The unweighted index, also called the equal weighted index, is one in which each stock in the index carries the same percentage weight.
Therefore, the largest stocks cannot unduly influence the index's movements. The drawback is that movements in small illiquid stocks have the
same importance as those of a market's most important benchmarks.
Question 155
Explain momentum strategies and mean-reversion strategies
LOS: Explain momentum strategies and mean-reversion strategies
Difficulty: medium
Bloom Code: 2
A trader using a mean-reversion strategy is most likely to trade stocks that have ___________________.
Correct
Been doing well for a long period
Underperformed the markets over a longer time period, but outperformed the markets in the past week
Outperformed their own price trend in a short time period
Stocks underperforming below their 200-day moving average
Rationale
 Been doing well for a long period
Correct: Mean reversion is the idea that if a stock has been doing really well for a long time and people seem to love the stock, then you should sell
on the premise that the stock will not do well in the future.
Rationale
 Underperformed the markets over a longer time period, but outperformed the markets in the past week
Incorrect: A trader using a mean-reversion strategy is not likely to trade stocks that have underperformed over a longer time period, but
outperformed the markets in the last week.
Rationale
 Outperformed their own price trend in a short time period
Incorrect: A trader using a mean-reversion strategy is not likely to trade stocks that have outperformed their own price trend in a short time period.
Rationale
 Stocks underperforming below their 200-day moving average
Incorrect: A trader using a mean-reversion strategy is not likely to trade stocks that are underperforming below their 200-day moving average.
Question 156
Difficulty: easy
An analyst or trader can use confirmation as the means to recognize what direction the _______________ trend is headed.
Correct
primary
secondary
minor
sideways
Rationale
 primary
Correct. Confirmation is the means for recognizing what direction the primary trend is headed.
Rationale
 secondary
Incorrect. Confirmation would not be the means to recognize where the secondary trend is headed.
Rationale
 minor
Incorrect. Confirmation would not be the means to recognize where the minor trend is headed.
Rationale
 sideways
Incorrect. Confirmation would not be the means to recognize where a sideways trend is headed.
Question 157
TB.LI.noise.tdrs.law.208
Lesson Reference: Noise Traders and the Law of One Price
Difficulty: hard
Which of the following explains the reason that the Law of One Price breaks down on frequent occasions?
Your Answer
Irrationality
Correct
Lack of fungibility
Noise traders
Presence of fungibility
Rationale
 Irrationality
Incorrect: Even though traders are often irrational because of hidden psychological biases, the Law of One Price does not usually break down
because of irrationality.
Rationale
 Lack of fungibility
Correct: When an identical good is fungible (i.e., cannot be transformed one into the other), except by buying one and selling the other, then the
Law of One Price breaks down.
Rationale
 Noise traders
Incorrect: Noise traders are generally classed as the non-rational masses who trade as part of the crowd. However, they are not the reason that the
Law of One Price breaks down.
Rationale
 Presence of fungibility
Incorrect: The presence of fungibility means that the Law of One Price should hold. If an identical asset can be transformed into the other by
costless conversion, then any difference in prices would soon be arbitraged away.
Question 158
Difficulty: easy
Bloom Code: 1
Correct
The tick mark on the left of a bar denotes the opening price for the day.
Your Answer
The tick mark on the left of a bar denotes the closing price for the day.
The tick mark on the left of a bar denotes the high price for the day.
The tick mark on the left of a bar denotes the low price for the day.
Rationale
 The tick mark on the left of a bar denotes the opening price for the day.
Correct. A small tick mark on the left side of the bar denotes the opening price for the day, if that data is included on the bar chart.
Rationale
 The tick mark on the left of a bar denotes the closing price for the day.
Incorrect. A tick mark on the left of the bar does not denote the closing price for the day.
Rationale
 The tick mark on the left of a bar denotes the high price for the day.
Incorrect. A tick mark on the left of the bar does not denote the high price for the day.
Rationale
 The tick mark on the left of a bar denotes the low price for the day.
Incorrect. A tick mark on the left of the bar does not denote the low price for the day.
Question 159
Identify the variables plotted on the axes in a conventional price chart/
LOS: Identify the variables plotted on the axes in a conventional price chart/
Difficulty: easy
Bloom Code: 1
When using two different vertical scales, a left y-axis and a right y-axis, it's important to remember that the _______________ is different.
Your Answer
time
Correct
scaling
slope
plotting
Rationale
 time
Incorrect. Time is not plotted on the y-axis when using two different vertical scales.
Rationale
 scaling
Correct. When using two y-axis scaled charts it must be remembered that scaling is different. An index ranging from 10,000 to 30,000, a threefold
value increase, and one ranging from 900 to 3,900, a fourfold increase, have extremely large variations in range.
Rationale
 slope
Incorrect. The slope of price displayed would not be the important element to consider when using two different vertical scales.
Rationale
 plotting
Incorrect. Plotting would not be the important element to consider when using two different vertical scales.
Question 160
Identify major global equity indexes
LOS: Identify major global equity indexes
Difficulty: easy
Bloom Code: 1
Which of the following is a regional equity market index?
Chicago Mercantile Exchange
Your Answer
NYMEX
Minneapolis Grain Exchange

Correct
STOXX Europe 600
Rationale
 Chicago Mercantile Exchange
Incorrect: The Chicago Mercantile Exchange is not an equity index and isn't regional, either.
Rationale
 NYMEX
Incorrect: The NYMEX isn't a regional market.
Rationale
 Minneapolis Grain Exchange
Incorrect: The Minneapolis Grain Exchange is not an equity market.
Rationale
 STOXX Europe 600
Correct: The STOXX Europe 600 index covers 600 companies in 17 European countries.
Question 161
Describe why value investing is similar to a mean-reversion approach
LOS: Describe why value investing is similar to a mean-reversion approach
Difficulty: hard
Bloom Code: 2
Value investing assumes that once investors realize the stock price should be _________, the price will __________.
Correct
higher/rise
higher/drop
lower/rise
lower/drop
Rationale
 higher/rise
Correct: Value investing also seemed to be similar to the message of mean reversion. Stocks that had not done well might be the best “values”
because investors overreact emotionally to a string of bad news without necessarily considering the underlying fundamentals.
Rationale
 higher/drop
Incorrect: Investors realizing that the stock price should be higher is correct; however, the price dropping is not the expectation.
Rationale
 lower/rise
Incorrect: Investors realizing that the stock price should be lower is not correct; however, the price rising is the expectation.
Rationale
 lower/drop
Incorrect: Investors realizing that the stock price should be lower is not correct; also, the price dropping is not the expectation.
Question 162
Difficulty: easy
Bloom Code: 1
Which statement regarding line charts is correct?
Correct
A daily line chart is easy to construct, but it does not reflect prices at other times within the day.
Line charts are no longer used as they contain less information than candlestick charts.
Line charts are used only to represent price action over longer time periods.
To construct a daily line chart, only two data points are needed for each day.
Rationale
 A daily line chart is easy to construct, but it does not reflect prices at other times within the day.
Correct. To construct a daily line chart, only one data point is needed: the last price at which the stock traded each day. This makes data collection
easy, but ignores the fact that the price may have been much different at other times during the day.
Rationale
 Line charts are no longer used as they contain less information than candlestick charts.
Incorrect. Line charts are still used and provide valuable information.
Rationale
 Line charts are used only to represent price action over longer time periods.
Incorrect. Line charts can be used on any time interval.
Rationale
 To construct a daily line chart, only two data points are needed for each day.
Incorrect. Two data points are not necessary to construct a daily line chart.
Question 163
Define open interest in futures
tb.LI.futures.0004_1901
LOS: Define open interest in futures
Lesson Reference: Futures
Difficulty: easy
Bloom Code: 2
Which of the following defines the number of futures contracts outstanding in each delivery month?
Your Answer
Volume
Settlement
Commitment of Traders
Correct
Open interest
Rationale
 Volume
Incorrect: Volume is not the definition of the number of futures contracts outstanding in each delivery month. In future markets terminology,
volume means the number of contracts traded each day.
Rationale
 Settlement
Incorrect: Settlement is not the definition of the number of futures contracts outstanding in each delivery month. Settlement refers to futures that
may settle in the physical delivery of the underlying asset or in cash based on the value of the underlying asset.
Rationale
 Commitment of Traders
Incorrect: The Commitment of Traders Report is not the definition of the number of futures contracts outstanding in each delivery month. It is a
weekly report from the Commodity Futures Trading Commission.
Rationale
 Open interest
Correct: Open interest is the number of futures contracts outstanding in each delivery month.
Question 164
Difficulty: easy
________________ during the second phase of a bull market.
Your Answer
Momentum slows
Accumulation begins
Correct
Public participation increases
Knowledgeable traders begin moving out of long positions
Rationale
 Momentum slows
Incorrect: Momentum increases in the second phase of a bull market.
Rationale
 Accumulation begins
Incorrect: Accumulation happens at the beginning of the primary trend. It is when knowledgeable traders begin acquiring long positions. It is also
marked by a period of consolidation.
Rationale
 Public participation increases
Correct: As the bull market enters its second phase more and more people begin to believe that a bull market is underway, public participation
increases.
Rationale
 Knowledgeable traders begin moving out of long positions
Incorrect: Distribution occurs when knowledgeable traders begin moving out of long positions, which usually happens in the third phase of a bull
market.
Question 165
Difficulty: easy
Which statement identifies the term a trader or analyst would use today versus when Dow theory was created?
Correct
Use the transportation average instead of the railroad average.
Use the technology average instead of the railroad average.
Use the utilities average instead of the industrial average.
Use the emerging markets average instead of the industrial average.
Rationale
 Use the transportation average instead of the railroad average.
Correct. The railroad average has been changed to the transportation average to represent airlines, trucks, and other means of shipping goods.
Rationale
 Use the technology average instead of the railroad average.
Incorrect. The technology average would not be used instead of the railroad average.
Rationale
 Use the utilities average instead of the industrial average.
Incorrect. The utilities average would not be used instead of the industrial average.
Rationale
 Use the emerging markets average instead of the industrial average.
Incorrect. The emerging markets average would not be used instead of the industrial average.
Question 166
Difficulty: easy
Which statement regarding market breadth is most correct?
Correct
The breadth of the stock market is called advance/decline data.
Market breadth indicators measure the external strength of the market.
Market breadth indicators consider whether company earnings are increasing or decreasing.
Market breadth indicators remain the same through time.
Rationale
 The breadth of the stock market is called advance/decline data.
Correct: The advance/decline data is called the breadth of the stock market.
Rationale
 Market breadth indicators measure the external strength of the market.
Incorrect: Market breadth indicators measure the internal strength of the market.
Rationale
 Market breadth indicators consider whether company earnings are increasing or decreasing.
Incorrect: Market breadth indicators consider whether stocks are gaining or losing in price.
Rationale
 Market breadth indicators remain the same through time.
Incorrect: Market breadth indicators do not remain the same. The analyst must frequently test indicators and make adjustments in the types and
parameters used.
Question 167
Difficulty: medium
In finance theory, randomness is described as ________________.
Your Answer
markets that are arbitrary
markets that are not efficient

Correct
markets that are not predictable
markets that are efficient
Rationale
 markets that are arbitrary
Incorrect: In finance theory, random does not mean arbitrary.
Rationale
 markets that are not efficient
Incorrect: According to finance theory, randomness is not described as markets that are not efficient.
Rationale
 markets that are not predictable
Correct: In finance theory, randomness means unpredictability.
Rationale
 markets that are efficient
Incorrect: Markets that are efficient can have non-random characteristics. For example, the expectation of a security's positive price change might
be the reward necessary to induce an investor to hold that security under some forms of EMH. According to finance theory, randomness is not
described as markets that are efficient.
Question 168
Describe data‐handling issues with which a technician should be familiar
LOS: Describe data‐handling issues with which a technician should be familiar
Difficulty: easy
Bloom Code: 2
Which description identifies a data handling issue?
The effect of iceberg orders on a chart
Your Answer
The price impact of block trades
The market participation level in small-cap stocks

Correct
Late trades
Rationale
 The effect of iceberg orders on a chart
Incorrect: The effect of iceberg orders is not a data handling issue.
Rationale
 The price impact of block trades
Incorrect: The price impact of block trades is not a data handling issue.
Rationale
 The market participation level in small-cap stocks
Incorrect: The market participation level in small-cap stocks is not a data handling issue.
Rationale
 Late trades
Correct: On active days the "tape" may run late because some trades are reported after the official close. These are referred to as late trades and
can potentially cause data issues.
Question 169
Describe the use of news and advisories as sentiment measures
LOS: Describe the use of news and advisories as sentiment measures
Difficulty: medium
Bloom Code: 2
Which statement regarding the Advisors' Sentiment Report (from Investors Intelligence) as a contrarian indicator about market bottoms is correct?
Your Answer
The report identifies market bottoms.
The report surveys investors for sentiment at market bottoms.
The report cannot be used as a contrarian indicator.

Correct
The report rarely identifies market bottom.
Rationale
 The report identifies market bottoms.
Incorrect: The Advisors' Sentiment Report issues data reporting percentages of advisors for bullish and bearish sentiment; it does not directly
identify a market bottom.
Rationale
 The report surveys investors for sentiment at market bottoms.
Incorrect: The Advisors' Sentiment Report does not survey investors; it surveys market views of over 100 independent investment advisor
newsletters.
Rationale
 The report cannot be used as a contrarian indicator.
Incorrect: The Advisors' Sentiment Report is used as a contrarian indicator.
Rationale
 The report rarely identifies market bottom.
Correct: The Advisors' Sentiment Report rarely identifies market bottoms. Investors Intelligence notes that bottoms occur when at least 55% of
advisors are bearish, an event that has happened just 10 times since 1987.
Question 170
Explain momentum strategies and mean-reversion strategies
LOS: Explain momentum strategies and mean-reversion strategies
Difficulty: medium
Bloom Code: 2
Which statement identifies what an investor or trader is most likely to do as a momentum trader?
Your Answer
Buy baskets of underperforming stocks and hold.
Buy stocks in a downtrend.

Correct
Buy stocks that have outperformed the markets.
Buy stocks underperforming over two years.
Rationale
 Buy baskets of underperforming stocks and hold.
Incorrect: Momentum investors or traders would not buy baskets of underperforming stocks. This would be counter to a momentum trading
strategy.
Rationale
 Buy stocks in a downtrend.
Incorrect: Momentum investors or traders would not buy stocks in a downtrend. This would be counter to a momentum trading strategy.
Rationale
 Buy stocks that have outperformed the markets.
Correct: A momentum strategy is based on the concept, in the short term, that stocks that are going up will continue the trend. Stocks going down
will continue the trend.
Rationale
 Buy stocks underperforming over two years.
Incorrect: Momentum investors or traders would not buy stocks underperforming for two years. This would be counter to a momentum trading
strategy.
Question 171
Difficulty: easy
Bloom Code: 1
Select the statement that describes the main reason charts are used.
Correct
Charts allow a user to determine if prices were increasing, decreasing, or remaining the same.
Your Answer
Charts allow for easier record keeping.
Charts can be used to determine the price of a security at any point in time.
Price charts contain more data points than a listing of prices.
Rationale
 Charts allow a user to determine if prices were increasing, decreasing, or remaining the same.
Correct. The main reason price charts are used by technical analysts is to determine if prices are increasing, decreasing, or remaining the same.
With this information trends. and sideways price movements can be detected.
Rationale
 Charts allow for easier record keeping.
Incorrect. Charts at one time were most likely used for record keeping; however, that is not the main reason charts are used today.
Rationale
 Charts can be used to determine the price of a security at any point in time.
Incorrect. Determining price points of a security at any point in time is a function of charts; however, that is not the main reason charts are used.
Rationale
 Price charts contain more data points than a listing of prices.
Incorrect. Price charts would be an advantage in many ways to listing prices; however, that is not the main reason charts are used.
Question 172
Difficulty: medium
What does the New Highs/New Lows line show in relation to its centerline?
Your Answer
Timing
Correct
Leadership
Divergence
Confirmation
Rationale
 Timing
Incorrect: The position of the NH/NL line in relation to its centerline is not a timing device.
Rationale
 Leadership
Correct: When the NH/NL line is below its centerline, it shows that bearish leadership is stronger. When the line is above its centerline, it shows that
bullish leadership is stronger.
Rationale
 Divergence
Incorrect: The position of the NH/NL line in relation to its centerline does not show divergence.
Rationale
 Confirmation
Incorrect: The position of the NH/NL line in relation to its centerline does not show confirmation.
Question 173
Describe the three most common measures of central tendency: mean, median and mode
LOS: Describe the three most common measures of central tendency: mean, median and mode
Difficulty: easy
Bloom Code: 2
_____________ is the most common measure of central tendency.
Your Answer
Geometric mean
Median
Mode
Correct
Arithmetic mean
Rationale
 Geometric mean
Incorrect: Geometric mean is a measure of central tendency, but it is not the most common.
Rationale
 Median
Incorrect: Median is a measure of central tendency, but it is not the most common.
Rationale
 Mode
Incorrect: Mode is a measure of central tendency, but it is not the most common.
Rationale
 Arithmetic mean
Correct: The most common measure of central tendency is the mean. While the technical term for this statistic is the arithmetic mean (a way of
differentiating from other approaches to calculating the mean), this is the stat most people are talking about when they use the term average or
mean.
Question 174
Difficulty: medium
Bloom Code: 2
Tammy is analyzing two different ETFs in the Communication Services sector. Both use the same benchmark and stocks. A recent market correction of
20% showed that one outperformed significantly compared to the other. Which statement identifies the reason for the difference in price?
Your Answer
They had different brokers

Correct
Different weighting
Different lock-up periods
Different subscription fees
Rationale
 They had different brokers
Incorrect: Although there are certainly transaction fees associated with the activity conducted by the ETF agents or managers, it is unlikely that
brokerage charges will contribute to a significant difference in performance between the two ETFs.
Rationale
 Different weighting
Correct: Although the two ETFs are tracking the same sector, share the same benchmark, and also own the same stocks, it is possible that each has
a different weighting of stocks. That can cause a variance in performance, where one ETF could significantly outperform another.
Rationale
 Different lock-up periods
Incorrect: Lock-up periods are associated with closely held investment vehicles. They do not apply to ETFs; therefore, this is not the reason for the
difference in performance.
Rationale
 Different subscription fees
Incorrect: ETFs are bought and sold through the exchange for your typical commission charges, similar to those incurred by purchasing stocks.
There is no subscription fee associated with such transactions. Subscription fees would not be the reason for the difference in performance.
Question 175
Difficulty: medium
Which statement identifies the Arms Index if the number of advancing stocks in the S&P 500 is 350, the number of declining stocks is 150, and the ratio of
UpVolume to DownVolume is 1.25?
Correct
1.87
2.91
0.34
0.54
Rationale
 1.87
Correct: The Arms Index is calculated as follows:
Arms Index = (Advances/Declines) / (UpVolume/DownVolume) = (350/150)/1.25 = 1.87
Rationale
 2.91
Incorrect: The Arms Index would not be 2.91.
Rationale
 0.34
Rationale
 0.54
Question 176
Difficulty: easy
The inverse of the Golden Mean is:
Your Answer
.382
.618
Correct
1.618
2.618
Rationale
 .382
This option is incorrect.
Rationale
 .618
Incorrect. Wave patterns often reflect a Fibonacci relationship. The key Fibonacci relationship in wave formations is .618, which is known as the
Golden Ratio or the Golden Mean.
Rationale
 1.618
Correct. This is the inverse to the Golden Mean.
Rationale
 2.618
This option is incorrect.
Question 177
Explain the differences between arithmetic and logarithmic scales and their uses.
LOS: Explain the differences between arithmetic and logarithmic scales and their uses.
Difficulty: medium
Bloom Code: 1
Using an example of a stock price increasing from $2 to $4 and five years later showing a price increase from $100 to $200, which statement describes the
benefits of using a logarithmic scale?
Correct
The vertical rise is measured in percentage changes, which place the same importance on both the smaller-dollar 100% increase and the larger-dollar
100% increase.
Your Answer
The logarithmic chart shows the analyst where the buy and sell points are, helping to manage risk.
The vertical rise is measured in dollar amounts so that an investor can calculate the gains or losses.
The logarithmic chart displays both small- and large-dollar increases and places more emphasis on the higher dollar amount increase.
Rationale
 The vertical rise is measured in percentage changes, which place the same importance on both the smaller-dollar 100% increase and the
larger-dollar 100% increase.
Correct. In percentage terms, the first gain in price is the same percentage gain that occurred later. A logarithmic chart keeps time and an
arithmetic price scale from obscuring that fact.
Rationale
 The logarithmic chart shows the analyst where the buy and sell points are, helping to manage risk.
Incorrect. The logarithmic chart would not show an analyst buy and sell points.
Rationale
 The vertical rise is measured in dollar amounts so that an investor can calculate the gains or losses.
Incorrect. Logarithmic charts do not measure dollar amounts.
Rationale
 The logarithmic chart displays both small- and large-dollar increases and places more emphasis on the higher dollar amount increase.
Incorrect. Logarithmic charts display all price increases. The emphasis is not on a higher dollar amount.
Question 178
Difficulty: medium
Bloom Code: 1
Regarding using a logarithmic scale it measures ____________change on the ________.
Your Answer
Price/x-axis
Price/y-axis
Percentage/x-axis
Correct
Percentage/y-axis
Rationale
 Price/x-axis
Incorrect. Price is not measured on the x-axis.
Rationale
 Price/y-axis
Incorrect. Price is not measured on the y-axis.
Rationale
 Percentage/x-axis
Incorrect. The x-axis is not used for measurements.
Rationale
 Percentage/y-axis
Correct. A logarithmic scale measures percentage on the y-axis.
Question 179
Recall the tools which aid in cycle identification
LOS: Recall the tools which aid in cycle identification
Difficulty: easy
Bloom Code: 2
As a technical analyst at a research firm, you have been assigned to study one of the emerging markets. Your first task is to identify the dominant cycle
and any active harmonics in said market. Select the tool that would most likely be of greater benefit to you.
Your Answer
Elliott waves
Fibonacci price retracements

Correct
Spectrograms
Stochastics
Rationale
 Elliott waves
Incorrect: Elliott waves can be used alongside cycle analysis but cannot be used to identify dominant cycles on a chart.
Rationale
 Fibonacci price retracements
Incorrect: This tool can help with identifying price retracements but not cycle analysis.
Rationale
 Spectrograms
Correct: Spectrograms is the correct answer.
Rationale
 Stochastics
Incorrect: Stochastics can be used alongside cycle analysis, but the most accurate answer here is spectrograms.
Question 180
Difficulty: medium
Identify the market technician who first used the term “Dow Theory.“
Charles Dow
Correct
Samuel A.C. Nelson
William P. Hamilton
Robert Rhea
Rationale
 Charles Dow
Incorrect. While Charles Dow is known as the “the father of technical analysis” because his were some of the earliest writings on stock market
dynamics and methods of stock speculation, he never wrote a book or created a compilation of his editorials.
Rationale
 Samuel A.C. Nelson
Correct. Samuel A.C. Nelson compiled ideas from Charles Dow's editorials into a book titled The ABC of Stock Speculation, which was published in
1903. It was in this book that Nelson first referred to Dow's work as Dow Theory.
Rationale
 William P. Hamilton
Incorrect. Hamilton was a journalist who joined the Wall Street Journal in 1899. He did much to organize and expand on Dow's ideas, but did not
coin the term Dow Theory.
Rationale
 Robert Rhea
Incorrect. Rhea studied Dow Theory and systemized the theories of both Charles Dow and William Hamilton, but Rhea was more of a Dow historian
than an innovator.
Question 181
Difficulty: hard
Bloom Code: 1
Which statement best describes why a logarithmic chart might be preferable to use over arithmetic charts?
The price rise or fall is represented vertically in dollar amounts.
Your Answer
An arithmetic chart displays price in percentages, making it difficult to assess the importance of a large move.
Correct
A logarithmic chart displays the same vertical rise based on percentages on the vertical axis.
A logarithmic chart represents data collected over a longer period of time, therefore smoothing the slope of price moves.
Rationale
 The price rise or fall is represented vertically in dollar amounts.
Incorrect. The price is displayed on the vertical y-axis on a logarithmic chart. However, the rise and fall of price does not best describe why a
logarithmic chart would be preferable.
Rationale
 An arithmetic chart displays price in percentages, making it difficult to assess the importance of a large move.
Incorrect. Arithmetic charts don't display price in percentage.
Rationale
 A logarithmic chart displays the same vertical rise based on percentages on the vertical axis.
Correct. Logarithmic scale charts use percentage changes on the vertical y-axis, which differs from arithmetic scale charts, which can
overemphasize moves. This allows the analyst to highlight a percentage increase over a long period of time.
Rationale
 A logarithmic chart represents data collected over a longer period of time, therefore smoothing the slope of price moves.
Incorrect. Logarithmic charts can collect data over all time periods and do not account for smoothing the slope of price moves.
Question 182
Difficulty: easy
When there are high numbers in the Plurality Index it is usually a sign of an _______.
Correct
impending market bottom.

Your Answer
impending market top.
oversold market.
overbought market.
Rationale
 impending market bottom.
Correct: High numbers in the Plurality Index are usually a sign of an impending market bottom.
Rationale
 impending market top.
Incorrect: When the Plurality Index shows high numbers it is not a sign of an impending market top.
Rationale
 oversold market.
Incorrect: When the Plurality Index shows high numbers it is not a sign of an oversold market.
Rationale
 overbought market.
Incorrect: When the Plurality Index shows high numbers it is not a sign of an overbought market.
Question 183
Difficulty: easy
Which parameter is required for a valid Hindenburg Omen signal?
Correct
The McClellan Oscillator is negative.
The 52-week highs and lows are each greater than 5% of total issues.
New highs cannot be more than four times the number of new lows.
Divergence, defined as two or more occurrences within a 30- to 36-day period, exists.
Rationale
 The McClellan Oscillator is negative.
Correct: The McClellan Oscillator needs to be negative.
Rationale
 The 52-week highs and lows are each greater than 5% of total issues.
Incorrect: The 52-week highs and lows are each greater than 2.2% of total issues.
Rationale
 New highs cannot be more than four times the number of new lows.
Incorrect: New highs cannot be more than two times the number of new lows.
Rationale
 Divergence, defined as two or more occurrences within a 30- to 36-day period, exists.
Incorrect: Confirmation, not divergence, is defined as two or more occurrences within a 30- to 36-day period.
Question 184
Difficulty: medium
Bloom Code: 1
Which statement is correct regarding the real body of a candlestick?
Correct
If the real body is white or hollow, the candlestick is bullish.
If the real body is black or filled, the candlestick is bullish.
If a candlestick is said to be “closed,” the real body is white.
If a candlestick is said to be “open,” the real body is black.
Rationale
 If the real body is white or hollow, the candlestick is bullish.
Correct. This rectangle is known as the real body of the candlestick. If the closing price is higher than the opening price, the real body is white or
open (also known as hollow or bullish). If the closing price falls below the opening price, then the real body is shaded. These candlesticks are said to
be closed or black (also known as filled or bearish).
Rationale
 If the real body is black or filled, the candlestick is bullish.
Incorrect. A black or filled candlestick is not interpreted as bullish.
Rationale
 If a candlestick is said to be “closed,” the real body is white.
Incorrect. A “closed” candlestick would not be white.
Rationale
 If a candlestick is said to be “open,” the real body is black.
Incorrect. An “open” candlestick would not have a black body.
Question 185
Difficulty: easy
Bloom Code: 1
Which statement describes the most likely first use of charts?
Your Answer
Charts were used to express energy and enthusiasm.

Correct
Charts were used as an early form of record keeping.
Charts were used to determine the value of a security.
Charts were used to record major price moves of a security.
Rationale
 Charts were used to express energy and enthusiasm.
Incorrect. The first use of charts was not likely to express energy and enthusiasm.
Rationale
 Charts were used as an early form of record keeping.
Correct. Charts probably first came into use as an early form of record keeping.
Rationale
 Charts were used to determine the value of a security.
Incorrect. The first use of charts was not likely to determine the value of a security.
Rationale
 Charts were used to record major price moves of a security.
Incorrect. The first use of charts was not likely to record major price moves of a security.
Question 186
Difficulty: medium
There are different versions of the common definition of the efficient market hypothesis (EMH). Which statement identifies the semi-strong version?
Historical stock market data is of no use in predicting future prices.
Your Answer
All information, whether public or private, is accurately reflected in prices.

Correct
Prices accurately summarize all publicly known information.
Technical analysis cannot help you “beat the market.”
Rationale
 Historical stock market data is of no use in predicting future prices.
Incorrect: This statement describes the weak form of the EMH, not the semi-strong version.
Rationale
 All information, whether public or private, is accurately reflected in prices.
Incorrect: This is the strong form of EMH, not the semi-strong version.
Rationale
 Prices accurately summarize all publicly known information.
Correct: This statement means that there is no advantage to be gained from studying publicly available information since this has already been
reflected in price. There is no such thing as a cheap or an expensive stock. The current price of the stock is always the best estimate of the price of
the stock.
Rationale
 Technical analysis cannot help you “beat the market.”
Incorrect: Though believers of efficient markets will agree that TA is of no use in attempting to beat the market, this statement does not reflect the
semi-strong version of EMH.
Question 187
Difficulty: medium
Which statement identifies the signal when the percentage of stocks above their 30-day moving average has been greater than 80% and then declines
below 60% the percentage will decline to or close to 30%?
Correct
A decline will occur.

Your Answer
A bottom has been formed.
A rally will start.
Stocks will trend sideways.
Rationale
 A decline will occur.
Correct: According to Ned Davis Research, Inc., the 80/60 rule states that when the percentage of stocks above their 30-day moving average has
been greater than 80% and then declines below 60%, the percentage will decline to or close to 30%, and a serious decline will likely follow such a
signal.
Rationale
 A bottom has been formed.
Incorrect: A bottom forming would not be the signal when the percentage of stocks above their 30-day moving average has been greater than 80%
and then declines below 60%. The percentage will decline to or close to 30%.
Rationale
 A rally will start.
Incorrect: A rally starting would not be the signal when the percentage of stocks above their 30-day moving average has been greater than 80% and
then declines below 60%. The percentage will decline to or close to 30%.
Rationale
 Stocks will trend sideways.
Incorrect: Stocks are not likely to trend sideways when the percentage of stocks above their 30-day moving average has been greater than 80% and
then declines below 60%. The percentage will decline to or close to 30%.
Question 188
Identify the basic terms of a debt instrument: issuer, coupon, maturity
tb.LI.fix.in.bond.0006.1119
LOS: Identify the basic terms of a debt instrument: issuer, coupon, maturity
Difficulty: medium
Bloom Code: 1
Governments and ______________ are major issuers of bonds.
Your Answer
municipalities
master limited partnerships

Correct
corporations
nongovernmental organizations
Rationale
 municipalities
Incorrect: Municipalities are state and local governments, but are not the other major issuer of bonds.
Rationale
 master limited partnerships
Incorrect: Master limited partnerships are not the other major issuer of bonds.
Rationale
 corporations
Correct: The major issuers of bonds are essentially governments and corporations.
Rationale
 nongovernmental organizations
Incorrect: Nongovernmental organizations can be a wide spectrum of bond issuers; however, they are not the other major issuer of bonds.
Question 189
Define equity securities and primary data types
LOS: Define equity securities and primary data types
Difficulty: easy
Bloom Code: 1
___________is limited to a stream of defined payments, whereas _________ have/has unlimited upside potential.
Correct
Debt/equities
Equities/debt
Equities/REITs
Equities/fixed income
Rationale
 Debt/equities
Correct: Debt provides defined payments as a promised rate of return, whereas equities have unlimited upside potential coupled with no
guarantees.
Rationale
 Equities/debt
Incorrect: Equities do not provide defined payments as a promised rate of return. Debt does not have unlimited upside potential coupled with no
guarantees.
Rationale
 Equities/REITs
Incorrect: Equities do not provide defined payments as a promised rate of return. REITs do not have unlimited upside potential coupled with no
guarantees.
Rationale
 Equities/fixed income
Incorrect: Equities do not provide defined payments as a promised rate of return. Fixed income does not have unlimited upside potential coupled
with no guarantees.
Question 190
State the value of data visualization as a complement to descriptive statistics
LOS: State the value of data visualization as a complement to descriptive statistics
Difficulty: easy
Bloom Code: 2
Exploratory data analysis can be of value because __________________.
Correct
it can be helpful in telling us when there is no exploitable relationship
it preserves the compound nature of investment returns
it can help amplify how daily returns of one stock on a given day can affect the daily returns of another
it measures how far a set of observations are scattered from their average
Rationale
 it can be helpful in telling us when there is no exploitable relationship
Correct: Exploratory data analysis can be useful in telling us when there is no exploitable relationship.
Rationale
 it preserves the compound nature of investment returns
Incorrect: This describes the geometric mean, not why exploratory data analysis can be of value.
Rationale
 it can help amplify how daily returns of one stock on a given day can affect the daily returns of another
Incorrect: This is true of data plotted on a scatterplot and not true for all the visualization tools. This does not describe why exploratory data
analysis can be of value.
Rationale
 it measures how far a set of observations are scattered from their average
Incorrect: This describes standard deviation and this application can be done on a scatterplot but not necessarily all other tools of visualization.
This does not describe why exploratory data analysis can be of value.
Question 191
Define “fractal” and how it relates to chart construction.
LOS: Define “fractal” and how it relates to chart construction.
Difficulty: easy
Bloom Code: 1
Which statement describes how traders or analysts can use fractals?
Your Answer
Fractals are continuation patterns that predict an extension in the current price direction.
Fractals help to determine the quantity of stock to purchase as part of a risk management strategy.
Fractals tell a trader how much the price has moved from its recent high/low.
Correct
Fractals are repeating patterns that allow a trader to spot trading opportunities.
Rationale
 Fractals are continuation patterns that predict an extension in the current price direction.
Incorrect. Fractals are not continuation patterns, and therefore don't predict an extension in the current price direction.
Rationale
 Fractals help to determine the quantity of stock to purchase as part of a risk management strategy.
Incorrect. Fractals are not used to determine the quantity of stock to purchase as part of risk management.
Rationale
 Fractals tell a trader how much the price has moved from its recent high/low.
Incorrect. Fractals don't tell traders how much the price has moved from recent highs or lows.
Rationale
 Fractals are repeating patterns that allow a trader to spot trading opportunities.
methods of charting, those methods can be applied in any time frame from very short-term intraday trading to long-term investing.
Question 192
TB.LI.ac.app.tech.032
Difficulty: easy
Which discipline influences the Adaptive Market Hypothesis in contrast to the Efficient Market Hypothesis?
Correct
Psychology
Mathematics
Physics
Economics
Rationale
 Psychology
Correct: The implications of the Adaptive Markets Hypothesis for technical analysts are significant. During normal times markets likely function
properly. However, when humans are subjected to emotional extremes, animal spirits may overwhelm rationality, even among seasoned investors.
Rationale
 Mathematics
Incorrect: Mathematics is not the discipline that influences the Adaptive Market Hypothesis in contrast to the Efficient Market Hypothesis.
Rationale
 Physics
Incorrect: Physics is not the discipline that influences the Adaptive Market Hypothesis in contrast to the Efficient Market Hypothesis.
Rationale
 Economics
Incorrect: Economics is not the discipline that influences the Adaptive Market Hypothesis in contrast to the Efficient Market Hypothesis.
Question 193
Difficulty: medium
Bloom Code: 1
Which statement is correct regarding the closing price on a candlestick?
Your Answer
If the closing price is higher than the opening price, the real body is shaded black.
If the closing price is lower than the opening price, the real body is white.
Correct
If the closing price is higher than the opening price, the real body is white.
If the closing price is lower than the opening price, the real body is hollow.
Rationale
 If the closing price is higher than the opening price, the real body is shaded black.
Incorrect. A higher closing price than the open would not be shaded black.
Rationale
 If the closing price is lower than the opening price, the real body is white.
Incorrect. If the closing price is lower than the opening price, the real body would not be white.
Rationale
 If the closing price is higher than the opening price, the real body is white.
Correct. This rectangle is known as the real body of the candlestick. If the closing price is higher than the opening price, the real body is white or
open (also known as hollow or bullish). If the closing price falls below the opening price, then the real body is shaded. These candlesticks are said to
be closed or black (also known as filled or bearish).
Rationale
 If the closing price is lower than the opening price, the real body is hollow.
Incorrect. If the closing price is lower than the opening price, the real body would not be hollow.
Question 194
Difficulty: medium
The strongest form of motive wave is:
Ending diagonal wave
Corrective wave
Correct
Impulse wave
Flat
Rationale
 Ending diagonal wave
Incorrect. A diagonal wave is not the strongest form of motive wave.
Rationale
 Corrective wave
Incorrect. A corrective wave is not a motive wave.
Rationale
 Impulse wave
This is the correct option.
Rationale
 Flat
Incorrect. A flat is a corrective wave, not a motive wave.
Question 195
Difficulty: easy
Which of the following describes a characteristic of an uptrend?
Correct
Higher troughs
Horizontal peaks
Lower troughs
Lower peaks
Rationale
 Higher troughs
Correct. Uptrends are characterized by higher peaks and higher troughs.
Rationale
 Horizontal peaks
Incorrect. An uptrend is not characterized by horizontal peaks. Sideways trends are characterized by horizontal peaks.
Rationale
 Lower troughs
Incorrect. Uptrends are not characterized by lower troughs.
Rationale
 Lower peaks
Incorrect. Uptrends are not characterized by lower peaks.
Question 196
Difficulty: medium
Bloom Code: 1
Which of the following statements is true regarding a volume-scaled chart?
Your Answer
A volume-scaled chart emphasizes heavy volume days.

Correct
A volume-scaled chart places emphasis on the progression of price over a unit of volume.
A volume-scaled chart emphasizes heavy and light volume days equally.
A volume-scaled chart places emphasis on the unit of volume over the progression of price.
Rationale
 A volume-scaled chart emphasizes heavy volume days.
Incorrect. Equivolume charts place emphasis on heavy volume days.
Rationale
 A volume-scaled chart places emphasis on the progression of price over a unit of volume.
Correct. Volume-scaled bars are based on a quantity of volume and they measure the amount of price change for a fixed amount of volume. Time is
a variable quantity for such bars, unlike normal candles that use a fixed unit of time and are accompanied by a variable quantity of volume.
Rationale
 A volume-scaled chart emphasizes heavy and light volume days equally.
Incorrect. Volume-scaled charts do not emphasize heavy volume days.
Rationale
 A volume-scaled chart places emphasis on the unit of volume over the progression of price.
Incorrect. A volume-scaled chart does not place emphasis on a unit of volume over the progression of price.
Question 197
Explain insider activity as a sentiment indicator
LOS: Explain insider activity as a sentiment indicator
Difficulty: easy
Bloom Code: 2
Which statement is most correct regarding following activity on insider trading?
Correct
Buying is generally more significant than insider selling.

Your Answer
The findings are used as a contrarian indicator.
The data seldom provides any significant results.
Selling is generally more significant than buying.
Rationale
 Buying is generally more significant than insider selling.
Correct: Buying is generally more significant than insider selling. This is because buying is done only because the insiders believe the market is
undervaluing the stock.
Rationale
 The findings are used as a contrarian indicator.
Incorrect: Although a sentiment measure, data collected from insiders’ activity is not applied in a contrarian manner. This is not the most correct
statement regarding following activity on insider trading.
Rationale
 The data seldom provides any significant results.
Incorrect: The data seldom providing any significant results is not the most correct statement regarding following activity on insider trading. There
are studies to contradict this.
Rationale
 Selling is generally more significant than buying.
Incorrect: Sellers can sell for a variety of reasons and are not normally a sign of trouble unless multiple insiders are selling large positions at around
the same time. This is not the most correct statement regarding following activity on insider trading.
Question 198
Difficulty: easy
Bloom Code: 1
Which of the following describes how price is displayed on the vertical y-axis?
Your Answer
Spaced closely
Percentage intervals
Time intervals
Correct
The same price intervals
Rationale
 Spaced closely
Incorrect. Price is not displayed as closely on a vertical y-axis.
Rationale
 Percentage intervals
Incorrect. An arithmetic chart does not implement percentages to display price.
Rationale
 Time intervals
Incorrect. Time intervals on not displayed on the vertical y-axis.
Rationale
 The same price intervals
Correct. The price units along the vertical y-axis are of the same price intervals. A change from $10 to $20 is the same distance as from $50 to $60.
Question 199
Classify sectors, capitalization and other ways to segment the market
LOS: Classify sectors, capitalization and other ways to segment the market
Difficulty: easy
Bloom Code: 1
Which of the following is a method of segmenting the market that includes large, medium, small, and micro?
Your Answer
Sectors and industries

Correct
Capitalization
Geographical reach of the firm's operation
Country of domicile
Rationale
 Sectors and industries
Incorrect: Sectors and industries is not the method of segmenting the market because it does not specifically include large, medium, small, and
micro.
Rationale
 Capitalization
Correct: Segmenting the stocks in a market based on their capitalization means by the value of a company such as “small caps” and “large caps.”
Rationale
 Geographical reach of the firm's operation
Incorrect: Geographical reach of the firm's operation is not the method of segmenting the market because it does not specifically include large,
medium, small, and micro.
Rationale
 Country of domicile
Incorrect: Country of domicile is not the method of segmenting the market because it does not specifically include large, medium, small, and micro.
Question 200
Difficulty: easy
Robert Rhea wrote three hypotheses on Dow theory. Identify which statement is one of the hypotheses.
Correct
Dow theory is not infallible.
The averages discount most things.
The secondary trend is inviolate.
The minor trend is inviolate.
Rationale
 Dow theory is not infallible.
Correct. This is one of the three hypotheses Robert Rhea wrote. Since Dow theory is not infallible, investment requires serious and impartial study.
Rationale
 The averages discount most things.
Incorrect. The averages discount most things is not a hypothesis Robert Rhea wrote.
Rationale
 The secondary trend is inviolate.
Incorrect. Robert Rhea did not refer to the secondary trend as being inviolate.
Rationale
 The minor trend is inviolate.
Incorrect. Robert Rhea did not refer to the minor trend as being inviolate.
Question 201
Difficulty: medium
What is the most likely conclusion when two major averages fail to reach new highs during a secondary advance in a primary bull market?
Correct
The primary trend may be reversing to a bear market.
The averages have provided confirmation.
The primary bull trend will continue.
The averages will enter a sideways trend.
Rationale
 The primary trend may be reversing to a bear market.
Correct. The failure to reach new highs during a secondary reaction is a warning that the primary trend may be reversing. This is called
nonconfirmation.
Rationale
 The averages have provided confirmation.
Incorrect. Both averages failing to reach new highs during a secondary advance in a primary bull market is a sign of nonconfirmation.
Rationale
 The primary bull trend will continue.
Incorrect. The failure to reach new highs during a secondary reaction is a warning that the primary trend may be reversing.
Rationale
 The averages will enter a sideways trend.
Incorrect. The failure to reach new highs during a secondary reaction is a warning that the primary trend may be reversing.
Question 202
Define “fractal” and how it relates to chart construction.
LOS: Define “fractal” and how it relates to chart construction.
Difficulty: easy
Bloom Code: 1
Plotting and analyzing price data is the same for all time frames. This is because of the ___________ nature of trends.
Your Answer
volatile
parabolic
long-term
Correct
fractal
Rationale
 volatile
Incorrect. Not all trends are volatile, however, volatility is not why plotting and analyzing price data can be done on all time frames.
Rationale
 parabolic
Incorrect. Not all trends will be parabolic, however, this is not why plotting and analyzing price data can be done on all time frames.
Rationale
 long-term
Incorrect. Long-term trends are not the reason price data can be plotted and analyzed on all time frames.
Rationale
 fractal
methods of charting, those methods can be applied in any time frame from very short-term intra-day trading to long-term investing.
Question 203
Explain the purpose of futures markets
LOS: Explain the purpose of futures markets
Difficulty: easy
Bloom Code: 2
Which of the following is a benefit to a corn farmer from selling corn futures, based on the purpose futures markets were designed for?
Your Answer
To provide funding for his new plant
To rebalance his portfolio
His portfolio was overlevereged and he needed to sell part of his position.
Correct
To reduce the risk from volatility and uncertainty by locking in prices
Rationale
 To provide funding for his new plant
Incorrect: Providing funding for his new plant is not a benefit to a corn farmer from selling corn futures, based on the purpose futures markets were
designed for.
Rationale
 To rebalance his portfolio
Incorrect: Rebalancing his portfolio is not a benefit to a corn farmer from selling corn futures, based on the purpose futures markets were designed
for.
Rationale
 His portfolio was overlevereged and he needed to sell part of his position.
Incorrect: A benefit to a corn farmer from selling corn futures based on the purpose futures markets were designed for would not be because his
portfolio was over leveraged and he needed to sell part of his position.
Rationale
 To reduce the risk from volatility and uncertainty by locking in prices
Correct: A farmer believes corn prices are at risk of decline due to any number of factors from ample rain, falling demand, and a strong downtrend.
He sells corn futures to lock in the sale price, thereby reducing risk from volatility and uncertainty.
Question 204
Difficulty: easy
Which statement describes why the track records of market newsletters are largely an exercise in futility?
Correct
It is because hardly anybody takes every trade suggested by a newsletter.
It is because most newsletters trade on insider information.
It is because most subscribers do not know how to trade.
It is because newsletters are too numerous.
Rationale
 It is because hardly anybody takes every trade suggested by a newsletter.
Correct: Usually newsletters will suggest numerous trades and then calculate their track records based on a trader taking all of the suggestions in
the size and manner indicated. Since practically nobody does this, calculating their track records is largely an exercise in futility.
Rationale
 It is because most newsletters trade on insider information.
Incorrect: Newsletters trading on insider information is not a factual statement, and not a reason track records are largely an exercise in futility.
Rationale
 It is because most subscribers do not know how to trade.
Incorrect: Newsletters recommend trades in lieu of subscribers having to do so themselves. However, this is not the reason that tracking the records
of most newsletters is largely an exercise in futility.
Rationale
 It is because newsletters are too numerous.
Incorrect: The number of newsletters is not connected to why they are largely an exercise in futility.
Question 205
Define the general concept of value investing
LOS: Define the general concept of value investing
Difficulty: easy
Bloom Code: 2
____________ is the concept that investors can beat the markets by studying the ___________ of a company.
Your Answer
CAGR/cash flow
Correct
Value investing/true value
Fundamental investing/price-to-earnings ratios
Momentum/true value
Rationale
 CAGR/cash flow
Incorrect: CAGR (compound annual growth rate) is not the concept that investors could beat the market by studying the cash flow of a company.
Rationale
 Value investing/true value
Correct: Graham and Dodd argued in their famous book that investors could profit by studying a company’s financial statements, income
statements, and balance sheet statements to ascertain its value. They implicitly and explicitly decried the “horserace” character of the public
markets and said the conscientious investor could beat the crowd by painstakingly studying the “true value” of a company.
Rationale
 Fundamental investing/price-to-earnings ratios
Incorrect: Fundamental investing is not the concept that investors could beat the market by studying the price-to-earnings ratios of a company.
Rationale
 Momentum/true value
Incorrect: Momentum is not the concept that investors could beat the market by studying the true value of a company.
Question 206
Difficulty: medium
Bloom Code: 1
Which of the following are two common variables on a price chart?
Your Answer
Histogram/volume
Shares/price
Price/candlesticks
Correct
Price/volume
Rationale
 Histogram/volume
Incorrect. Histograms are not a common variable on a price chart.
Rationale
 Shares/price
Incorrect. Shares are not a common variable on a price chart.
Rationale
 Price/candlesticks
Incorrect. Candlesticks are not a common variable found on a price chart.
Rationale
 Price/volume
Correct. Price and volume are common variables found on a price chart.
Question 207
Define “sentiment” as it relates to financial markets
LOS: Define “sentiment” as it relates to financial markets
Difficulty: easy
Bloom Code: 2
Sharon has analyzed a stock using both fundamentals and technical analysis. She notices the price is well above its fair value. Which statement describes
the reason?
Correct
There is strong bullish sentiment.
New information came to light that led to adjusting the fair value of said stock.
The stock was relatively low-priced based on its comparative analysis to its peers.
The institutional selling around the fair value led to some offloading of the stock; what is happening now is mostly temporary and the stock will
reverse.
Rationale
 There is strong bullish sentiment.
Correct: The stock price can remain above its fair value so long as sentiment remains bullish even though the fundamentals do not justify the high
price.
Rationale
 New information came to light that led to adjusting the fair value of said stock.
Incorrect: New information coming out is not likely the reason the stock is well above its fair value. Although information released can often cause
price reactions, it's not likely the reason the stock was above its fair value.
Rationale
 The stock was relatively low-priced based on its comparative analysis to its peers.
Incorrect: Although this is possible, it's highly unlikely that industry consensus would not have factored that piece of information into the fair value.
This is not the reason the stock was above its fair value.
Rationale
 The institutional selling around the fair value led to some offloading of the stock; what is happening now is mostly temporary and the
stock will reverse.
Incorrect: Institutional selling around the fair value is not likely the reason the stock is trading above its fair value.
Question 208
Classify various futures markets as industrial, agricultural, financial, etc.
LOS: Classify various futures markets as industrial, agricultural, financial, etc.
Difficulty: medium
Bloom Code: 1
Which assets are traded under the category of energy futures?
Correct
Jet fuel, propane, coal, heating oil, and some biofuels
Propane, soft fibers, biofuels, and gasoline
Cocoa, coal, heating oil, and some biofuels
Single stocks and global indexes
Rationale
 Jet fuel, propane, coal, heating oil, and some biofuels
Correct: Energy futures will trade jet fuel, propane, coal, heating oil, and some biofuels. All are assets within the energy futures category. include jet
fuel, propane, coal, heating oil, and some biofuels.
Rationale
 Propane, soft fibers, biofuels, and gasoline
Incorrect: Propane, soft fibers, and biofuels are assets within the energy futures category; however, soft fibers are not.
Rationale
 Cocoa, coal, heating oil, and some biofuels
Incorrect: Coal, heating oil, and some biofuels are assets within the energy futures category; however, cocoa is not.
Rationale
 Single stocks and global indexes
Incorrect: Single stocks and global indexes are traded through the futures markets; however, they are not traded within an asset class of energy
futures.
Question 209
Difficulty: easy
Which of the following describes a stimulus for the development of technical analysis?
Correct
Growth of markets
Efficient market hypothesis
Lack of speculation in markets
Quantitative analysis
Rationale
 Growth of markets
Correct. The growth of markets was one stimulus for the development of technical analysis. The creation of financial exchanges required the need
for visualizing market data.
Rationale
 Efficient market hypothesis
Incorrect. The efficient market hypothesis implies that no patterns in market data are exploitable through trading strategies. The efficient market
hypothesis dismisses technical analysis as a mathematical impossibility.
Rationale
 Lack of speculation in markets
Incorrect. Speculation was a stimulus for the development of technical analysis. Speculation and technical analysis share an awareness of market
psychology and of the forces of supply and demand.
Rationale
 Quantitative analysis
Incorrect. Quantitative analysis views technical analysis as antiquated and contrived in its very foundations.
Question 210
Define a composite wave
LOS: Define a composite wave
Difficulty: easy
Bloom Code: 2
In cycle theory, price is viewed as a(n) _________wave, a summation of individual cycles as well as the trend.
J.M. Hurst outlined seven principles of commonality that apply to cycle analysis as they apply to financial markets. Select the principle that can best fill
the space in the sentence above,
Correct
Composite
Extended
Truncated
Harmonic
Rationale
 Composite
Correct: In cycle theory, price is viewed as a composite wave, a summation of individual cycles as well as the trend.
Rationale
 Extended
Incorrect: Composite is correct answer.
Rationale
 Truncated
Rationale
 Harmonic
Question 211
Difficulty: medium
Bloom Code: 1
Which statement reflects the importance of understanding chart construction?
Your Answer
A technical analyst is not required to understand how charts are constructed since charts can be computer generated.
Correct
It is important to understand how charts are constructed as the construction of charts provides intuition on price movements.
It is important to understand how charts are constructed so technical analysts can hand-draw charts.
It is important to understand how charts are constructed so technical analysts can have an edge over fundamental analysts.
Rationale
 A technical analyst is not required to understand how charts are constructed since charts can be computer generated.
Incorrect. Charts can be easily computer generated today, but understanding basic charts from a rudimentary point is important.
Rationale
 It is important to understand how charts are constructed as the construction of charts provides intuition on price movements.
Correct. Even if you will be relying on computer-generated charts, it is important to understand how those charts are constructed. Additionally,
spending a bit of time focusing on the mechanics of chart construction will help you gain perspective on the intuition that previous generations of
technical analysts developed when they created their own charts by hand.
Rationale
 It is important to understand how charts are constructed so technical analysts can hand-draw charts.
Incorrect. Some technical analysts still draw charts by hand, however that is not the reason for understanding chart construction.
Rationale
 It is important to understand how charts are constructed so technical analysts can have an edge over fundamental analysts.
Incorrect. Understanding chart construction to have an edge over fundamental analysts is not the reason for understanding chart construction.
Question 212
Difficulty: easy
Which term identifies the index that is computed by dividing the advance/decline ratio by the ratio of advancing volume to declining volume?
Correct
The Arms Index
Absolute Breadth Index
Unchanged Issues Index
Overbought/Oversold Index
Rationale
 The Arms Index
Correct: The ARMS index is computed by dividing the advance/decline ratio by the ratio of advancing volume to declining volume.
Rationale
 Absolute Breadth Index
Incorrect: The Absolute Breadth Index is the sum of subtracting declines from advances and dividing by the number of shares traded on the
exchange.
Rationale
 Unchanged Issues Index
Incorrect: The Unchanged Issues Index is calculated by dividing the number of unchanged stocks by the total issues traded.
Rationale
 Overbought/Oversold Index
Incorrect: The Overbought/Oversold Index is calculated by dividing the number of advancing stocks by the number of declining stocks.
Question 213
Difficulty: easy
Which of the following is the most correct description of technical analysis?
Correct
The study of mass psychology
The science of stock price movement
The study of randomness
The study of bounded rationality
Rationale
 The study of mass psychology
Correct. When buyers feel strongly bullish, their eagerness to buy pushes up prices. When sellers feel strongly bearish, their eagerness to sell pushes
down prices. This battle between the bulls and bears is a reflection of mass psychology, which we study using charts.
Rationale
 The science of stock price movement
Incorrect. Much of technical analysis is subjective and not repeatable under controlled conditions; therefore, it is not a science.
Rationale
 The study of randomness
Incorrect. Technical analysts believe that stock prices are forecastable and therefore not random.
Rationale
 The study of bounded rationality
Incorrect. Bounded rationality was economist Herbert Simon's model of financial markets based on the idea that human beings are naturally
limited in their computational ability and therefore bound to make choices that are not optimal in contrast to classical economic theory.
Question 214
Identify the three primary groups in the Commitments of Traders report
LOS: Identify the three primary groups in the Commitments of Traders report
Difficulty: easy
Bloom Code: 2
What identifies for physical commodities and energy markets, based on the Commitments of Traders (COT) reports, one of the four categories market
participants are assigned to?
Your Answer
Commercial Hedgers
Asset Manager
Processor
Correct
Swap Dealers
Rationale
 Commercial Hedgers
Incorrect: Commercial hedgers are not included as one of the groups market participants are assigned to for physical commodities and energy
markets.
Rationale
 Asset Manager
Incorrect: Asset managers are not included as one of the groups market participants are assigned to for physical commodities and energy markets.
Rationale
 Processor
Incorrect: Processors are not included as one of the groups market participants are assigned to for physical commodities and energy markets.
Rationale
 Swap Dealers
Correct: Swap dealers are categorized as market participants in energy markets.
Question 215
Difficulty: easy
Identify one of the averages created by Charles Dow.
Correct
Railroad average
Utilities average
Transportation average
Energy sector average
Rationale
 Railroad average
Correct. Charles Dow was the creator of the railroad average.
Rationale
 Utilities average
Incorrect. Charles Dow did not create a utilities average.
Rationale
 Transportation average
Incorrect. Charles Dow did not create a transportation average.
Rationale
 Energy sector average
Incorrect. Charles Dow did not create an energy sector average.
Question 216
Difficulty: medium
Which of the following is a rationale for the evolution of the Efficient Market Hypothesis (EMH)?
Your Answer
The rise of hedge funds
The increased use of computers in trading

Correct
The movement of investing toward science
The rise of quants
Rationale
 The rise of hedge funds
Incorrect: The rise of hedge funds was not the reason for the evolution of EMH.
Rationale
 The increased use of computers in trading
Incorrect: The rise of the academic discipline known as EMH predated the rise in the use of computers in trading in the second half of the twentieth
century. This does not describe the rationale for the evolution of EMH.
Rationale
 The movement of investing toward science
Correct: Preda argued that the efficient market hypothesis was the result of a “slow evolution of popular knowledge into an academic, formalized
science.”
Rationale
 The rise of quants
Incorrect: A quant, like a technical analyst, attempts to predict the future based on models of the past. They were not responsible for the rise of
EMH, which is an academic concept. This does not describe the rationale for the evolution of EMH.
Question 217
Difficulty: easy
Which statement best describes drawing trend lines?
Your Answer
Connecting the peaks when prices are rising and connecting the troughs when prices are falling
Correct
Connecting the troughs when prices are rising and connecting the peaks when prices are falling
Connecting the peaks when prices are rising and connecting the peaks when prices are falling
As a best-fit line through the majority of the price action
Rationale
 Connecting the peaks when prices are rising and connecting the troughs when prices are falling
Incorrect. When drawing trend lines, such as a single support line or a resistance line, the trend line would not be drawn connecting peaks when
price is rising or connecting troughs when prices are falling.
Rationale
 Connecting the troughs when prices are rising and connecting the peaks when prices are falling
Correct. Uptrend lines are plotted between support troughs and downtrend lines are plotted between resistance peaks.
Rationale
 Connecting the peaks when prices are rising and connecting the peaks when prices are falling
Incorrect. A trend line would not connect peaks when prices are rising and when prices are falling.
Rationale
 As a best-fit line through the majority of the price action
Incorrect. A trend line would not be drawn as a best-fit line through the majority of the price action.
Question 218
Difficulty: easy
According to Charles Dow, confirmation of a signal had to be confirmed by the industrial average and the _____________.
Correct
railroad average
utilities average
transportation average
technology average
Rationale
 railroad average
Correct. Dow argued that railroad and industrial averages had to confirm each other for a signal to be conclusive in judging future trends.
Rationale
 utilities average
Incorrect. The utilities average was not included as confirmation.
Rationale
 transportation average
Incorrect. There was not an average called transportation yet, only industrials.
Rationale
 technology average
Incorrect. A technology average was not in existence when Charles Dow wrote about a confirmation signal.
Question 219
Difficulty: medium
Bloom Code: 1
Which statement regarding candlestick charts is correct?
Your Answer
A candlestick records three pieces of data.
A daily candlestick with no shadow means that the prices at the open and close are equal to the high and low prices of the previous trading day.
Correct
Candlestick charts contain the same price information as bar charts drawn using OHLC data.
A candle in a candlestick chart represents the open-high-low-mid prices for the trading day.
Rationale
 A candlestick records three pieces of data.
Incorrect. Candlestick charts are not limited to recording three pieces of data.
Rationale
 A daily candlestick with no shadow means that the prices at the open and close are equal to the high and low prices of the previous
trading day.
Incorrect. A candlestick with no shadow does not mean prices at the open and close are equal to high and low prices of the previous trading day.
Rationale
 Candlestick charts contain the same price information as bar charts drawn using OHLC data.
Correct. The difference between the two charting methods is the representation of the relationship between the opening and closing prices. Bar
charts will use hash marks to display the open and close. Candlestick charts use a line across the bar for both the open and close. Shading or color
is used to denote whether the open or close was higher of the two.
Rationale
 A candle in a candlestick chart represents the open-high-low-mid prices for the trading day.
Incorrect. Candlestick charts do not use mid prices for the trading day.
Question 220
Difficulty: medium
Which wave is always an impulse wave?
Your Answer
Wave 1
Wave 2
Correct
Wave 3
Wave 5
Rationale
 Wave 1
Incorrect. Wave 1 can be either an impulse or a diagonal.
Rationale
 Wave 2
Incorrect. Wave 2 is a corrective wave. Corrective waves are not impulse waves.
Rationale
 Wave 3
Correct. Wave 3 can only be an impulse wave.
Rationale
 Wave 5
Incorrect. Wave 5 can either be an impulse wave or a diagonal.
Question 221
Memorize notable economic cycles and their periods
LOS: Memorize notable economic cycles and their periods
Difficulty: easy
Bloom Code: 2
This cycle has a period of approximately 7 to 11 years, averaging about 9 years, and it is sometimes called the fixed investment cycle.
Identity the cycle that best fits the previous description from the following list.
Your Answer
Kuznets cycle
Correct
Juglar cycle
Kondratieff wave
Economic cycle
Rationale
 Kuznets cycle
Incorrect: The correct answer is the Juglar cycle.
Rationale
 Juglar cycle
Correct: First identified in 1862 by French economist Clemente Juglar (1819−1905), the Juglar cycle has a period of approximately 7 to 11 years
(averaging 9 years). It is sometimes referred to as the “fixed investment” cycle. Juglar's studies produced evidence that crises are periodical and not
random.
Rationale
 Kondratieff wave
Rationale
 Economic cycle
Question 222
Difficulty: easy
Which principle is Dow theory based on?
Correct
Bull and bear markets
Non-trending stock prices
Four well-defined movements
Static markets
Rationale
 Bull and bear markets
Correct. A defining principle of Dow theory is the idea of a trend that is exhibited by successive highs (bull market) and lows (bear market) as
indicators.
Rationale
 Non-trending stock prices
Incorrect. Non-trending stock prices is not a principle Dow theory is based on. Non-trending prices would describe a sideways trending market.
Rationale
 Four well-defined movements
Incorrect. Dow theory describes three well-defined movements, not four.
Rationale
 Static markets
Incorrect. Dow theory is defined by trending markets.
Question 223
Difficulty: medium
When one trading session's high is $50, the low is $40, and the close is $44, what is the A/D?
Correct
–0.20
0.20
–0.33
0.33
Rationale
 –0.20
Correct: The A/D is calculated as follows:
([(Close − Low) − (High − Close)]/(High − Low)) = A/D
([(44 − 40) − (50 − 44)]/(50 − 40)) = −0. 20
Rationale
 0.20
Incorrect: 0.20 is not the correct calculation for the A/D.
Rationale
 –0.33
Incorrect: −0.33 is not the correct calculation for the A/D.
Rationale
 0.33
Incorrect: 0.33 is not the correct calculation for the A/D.
Question 224
Difficulty: easy
Skilled trading is a mastery of:
Correct
Self
Observation
Analysis
Humility
Rationale
 Self
Correct. Trading and analysis require different skill sets. Mastery of trading requires one to gain mastery of self.
Rationale
 Observation
Incorrect. Mastery of observation is a skill one needs to become a successful analyst.
Rationale
 Analysis
Incorrect. Analysis and trading are two different and separate skills.
Rationale
 Humility
Incorrect. Humility is an essential quality for a successful trader to have but its mastery does not correlate to successful trading.
Question 225
Difficulty: medium
Bloom Code: 1
An analyst would use two different vertical y-axis scales to determine if the two variables are generally moving in _________________ and spot periods
of _____________and _____________.
Your Answer
cycles/bullishness/bearishness
rotation/strength/weakness
increments/fear/greed
Correct
tandem/strength/weakness
Rationale
 cycles/bullishness/bearishness
Incorrect. An analyst would use other methods to determine cycles instead of two vertical y-axis scales. Bullishness or bearishness directly would
not likely be determined other than direction of trend.
Rationale
 rotation/strength/weakness
Incorrect. An analyst would use other methods to determine rotation instead of two vertical y-axis scales.
Rationale
 increments/fear/greed
Incorrect. An analyst would use other methods to determine any increments, fear, or greed instead of two vertical y-axis scales.
Rationale
 tandem/strength/weakness
Correct. Using two vertical y-axis scales allows analysts to tell if two variables are generally moving in tandem and spot periods of strength and
weakness. Charts with different vertical scales are used to normalize the visual representation of two different data series. When presented this
way, the appearance of correlation and strength or weakness becomes more readily apparent.
Question 226
Difficulty: medium
A line, according to Dow theory, is _____________.
any trending period in which a trendline can be drawn
Correct
usually a sign of accumulation or distribution
intermediate price formations
two to three weeks of vertical price movement
Rationale
 any trending period in which a trendline can be drawn
Incorrect. According to Dow theory, a line is not just any trendline that can be drawn on a price chart. It has to have more specific characteristics to
qualify as a line.
Rationale
 usually a sign of accumulation or distribution
Correct. A line is a period of horizontal price movement or a trading range, usually within a 5% range. According to Dow theory, a line is usually a
sign of accumulation or distribution.
Rationale
 intermediate price formations
Incorrect. According to Dow theory, an intermediate price formation is not a line but a secondary reaction.
Rationale
 two to three weeks of vertical price movement
Incorrect. According to Dow theory, a line is not a vertical price movement, though the formation will usually last for two to three weeks.
Question 227
Describe the use of futures open interest in gauging sentiment
LOS: Describe the use of futures open interest in gauging sentiment
Difficulty: easy
Bloom Code: 2
Which statement describes the correct interpretation for when a downtrend has increasing open interest?
Your Answer
The downtrend will reverse.
The downtrend will form a trading range.

Correct
The downtrend will continue.
The downtrend will continue at a lower pace.
Rationale
 The downtrend will reverse.
Incorrect: The downtrend is not likely to reverse with increasing open interest.
Rationale
 The downtrend will form a trading range.
Incorrect: A downtrend with increasing open interest is not likely to form a trading range.
Rationale
 The downtrend will continue.
Correct: If the direction of trend was down with an increasing open interest, then the downtrend is likely to continue.
Rationale
 The downtrend will continue at a lower pace.
Incorrect: A downtrend with increasing open interest could continue at a lower pace; however, this is not the correct description of what it is most
likely to do.
Question 228
Difficulty: medium
Bloom Code: 1
Which statement regarding candlestick charts is correct?
Correct
A candlestick chart contains more information than a bar chart, as each candle will additionally contain the opening price, which is sometimes omitted
from a bar chart.
A candlestick chart is less inclusive than a bar chart.
Candlestick charts originated in the United States and became popular in Japanese and European markets.
A candle in a candlestick chart provides five key prices in a trading day.
Rationale
 A candlestick chart contains more information than a bar chart, as each candle will additionally contain the opening price, which is
sometimes omitted from a bar chart.
Rationale
 A candlestick chart is less inclusive than a bar chart.
Incorrect. Candlestick charts are not less inclusive than bar charts.
Rationale
 Candlestick charts originated in the United States and became popular in Japanese and European markets.
Incorrect. Candlestick charts did not originate in the United States. They originated in Japan.
Rationale
 A candle in a candlestick chart provides five key prices in a trading day.
Incorrect. A candlestick chart does not contain five key prices in a trading day.
Question 229
Describe the use of news and advisories as sentiment measures
LOS: Describe the use of news and advisories as sentiment measures
Difficulty: easy
Bloom Code: 2
Which statement identifies the newsletter surveying market views of independent newsletter writers as a contrarian indicator?
Your Answer
AAII
Advisor's Sentiment Report

Correct
Investors Intelligence
COT
Rationale
 AAII
Incorrect: AAII is the American Association of Individual Investors and it measures the sentiment of individual investors. AAII is not the newsletter
surveying market views of independent newsletter writers as a contrarian indicator.
Rationale
 Advisor's Sentiment Report
Incorrect: The Advisor's Sentiment Report is issued by Investor's Intelligence. The Advisor's Sentiment Report is not the newsletter surveying
market views of independent newsletter writers as a contrarian indicator.
Rationale
 Investors Intelligence
Correct: Investors Intelligence has published the Advisor's Sentiment Report since 1963. This report surveys the market views of over 100
independent investment newsletters.
Rationale
 COT
Incorrect: COT is the Commitments of Traders report issued by the Commodity Futures Trading Commission. The COT is not the newsletter
surveying market views of independent newsletter writers as a contrarian indicator.
Question 230
Understand the uses for leveraged ETPs
LOS: Understand the uses for leveraged ETPs
Difficulty: medium
Bloom Code: 2
Ernie is trading a 2x leveraged S&P 500 ETF and is long. The market dropped sharply over the past week, losing 20%. Prices recovered with a V-shape
recovery, recouping all of the losses. Ernie's long position is showing a loss, despite the market recovery. Which statement identifies the reason for the
loss?
Your Answer
He miscalculated number of shares owned.
He was actually short his position and made an order error.

Correct
There was price decay,
There were high transaction costs.
Rationale
 He miscalculated number of shares owned.
Incorrect: It is not likely that the loss, regardless of the market's recovery, would be due to miscalculating the number of shares owned.
Rationale
 He was actually short his position and made an order error.
Incorrect: His position was long; therefore, that is not the cause of the loss, despite the market's recovery.
Rationale
 There was price decay,
Correct: Over time, the ups and downs in a leveraged ETF will naturally cause price decay.
Rationale
 There were high transaction costs.
Incorrect: High transaction costs will always add to a loss; however, this was not the cause of the loss, despite the market's recovery.
Question 231
Difficulty: medium
A diagonal can be found in which wave position?
Correct
Wave 1 of a motive wave
Wave 3 of motive wave
Rationale
 Wave 1 of a motive wave
Correct. A diagonal can sometimes appear as wave 1 of motive wave. A diagonal is a triangle motive pattern which is not an impulse. It is the only 5-
wave structure in the direction of the main trend.
Rationale
 Wave 2 of a motive wave
Incorrect. A diagonal does not appear as wave 2 of a motive wave.
Rationale
 Wave 3 of motive wave
Incorrect. A diagonal never appears as wave 3 of a motive wave.
Rationale
 Wave 4 of a motive wave
Incorrect. A diagonal does not appear as wave 4 of a motive wave.
Question 232
Difficulty: easy
Bloom Code: 1
The length of a bar indicates the trading range for that day. The ___ of the bar records the ___ price at which the security traded, and the ___ of the bar
records the ___ price at which the security traded that day.
Your Answer
right/highest/left/lowest
left/highest/right/lowest
bottom/highest/top/lowest
Correct
top/highest/bottom/lowest
Rationale
 right/highest/left/lowest
Incorrect. The right of the bar is not used to record highs. The left of the bar is not used to record lows.
Rationale
 left/highest/right/lowest
Incorrect. The left of the bar is not used to record highs. The right of the bar is not used to record the lowest price.
Rationale
 bottom/highest/top/lowest
Incorrect. The bottom of the bar is not used to record the highest price. The top of the bar is not used to record the low of the day.
Rationale
 top/highest/bottom/lowest
Correct. The length of the bar indicates the trading range for that day. The top of the bar records the highest price at which the security traded and
the bottom of the bar records the lowest price at which the security traded that day.
Question 233
List the major terms of a futures contract
LOS: List the major terms of a futures contract
Difficulty: easy
Bloom Code: 1
_______________ describes a synthetic price series of futures contracts used to provide long-term price analysis.
Your Answer
Settlement
Contango
Backwardation
Correct
Continuous contract
Rationale
 Settlement
Incorrect: Settlement does not describe a synthetic price series of futures contracts used to provide long-term price analysis. Settlement refers to
futures that may settle in the physical delivery of the underlying asset or in cash based on the value of the underlying asset.
Rationale
 Contango
Incorrect: Contango is an upward-sloping curve for contract maturities. Near-month prices are lower than far-month prices.
Rationale
 Backwardation
Incorrect: Backwardation is a downward-sloping curve for contract maturities. Near-month prices are lower than far-month prices.
Rationale
 Continuous contract
Correct: Continuous contract is a synthetic price series of futures contracts used to provide long-term price analysis.
Question 234
Describe how randomly generated output can appear nonrandom and how that might relate to asset prices and returns
tb.LI.eff.mkt.hypoth.0006.1119
LOS: Describe how randomly generated output can appear nonrandom and how that might relate to asset prices and returns
Difficulty: medium
Bloom Code: 1
Which statement regarding Elliott wave patterns is most correct?
Your Answer
Elliott wave patterns refute the Efficient Market Hypothesis.

Correct
Elliott Wave patterns, like all price patterns, may even appear among random data series.
Elliott wave patterns have been shown to be far more accurate forecasting tools than Hurst cycles.
Elliott wave patterns confirm the Efficient Market Hypothesis.
Rationale
 Elliott wave patterns refute the Efficient Market Hypothesis.
Incorrect: Elliott wave patterns refuting the efficient market hypothesis is not a correct statement, according the EMH.
Rationale
 Elliott Wave patterns, like all price patterns, may even appear among random data series.
Correct: It turns out that there are many more ways for the outcome of a randomly generated data series to look like a pattern than there are ways
for it to look random. Put another way, output from a randomly generated process will typically exhibit trends, repetition, and other patterns even
though the results are generated by a truly random.
Rationale
 Elliott wave patterns have been shown to be far more accurate forecasting tools than Hurst cycles.
Incorrect: Elliott wave patterns being more accurate than Hurst cycles is not the most correct statement. Hurst cycles are a form of analysis based
on cycle analysis. Elliott waves are specific price patterns.
Rationale
 Elliott wave patterns confirm the Efficient Market Hypothesis.
Incorrect: Elliott wave patterns, like all price patterns, may even appear among random data series.
Question 235
Describe cryptocurrencies
LOS: Describe cryptocurrencies
Difficulty: easy
Bloom Code: 2
Which of the following describes both an attractive feature and a potential risk of cryptocurrencies?
Your Answer
High price gains with little risk
Their underlying fundamentals

Correct
Anonymity
The ease of applying technical analysis to them
Rationale
 High price gains with little risk
Incorrect: High price gains with little or no risk is not either an attractive feature or a potential risk of cryptocurrencies. All markets have risk.
Rationale
 Their underlying fundamentals
Incorrect: Cryptocurrency markets do not use fundamentals because there is nothing to analyze. There is nothing real backing them up.
Rationale
 Anonymity
Correct: The potential risk from critics is that the cryptocurrency markets could be used for illegal purposes such as money laundering.
Rationale
 The ease of applying technical analysis to them
Incorrect: The ease of applying technical analysis is not either an attractive feature or a potential risk of cryptocurrencies.
Question 236
Difficulty: easy
According to the semi-strong definition of the EMH, stock prices incorporate __________.
Your Answer
all information
Correct
all publicly known information
past stock prices
the strong-form version of the EMH
Rationale
 all information
Incorrect: The strong-form definition of the EMH assumes that stock prices incorporate all information, private as well as public.
Rationale
 all publicly known information
Correct: The semi-strong version of the EMH incorporates all publicly known information.
Rationale
 past stock prices
Incorrect: The weak-form definition of the EMH assumes that stock prices incorporate past stock prices only.
Rationale
 the strong-form version of the EMH
Incorrect: The semi-strong version does not assume that all information is incorporated into stock prices. The strong-form definition of the EMH
assumes that stock prices incorporate all information, private as well as public.
Question 237
Difficulty: medium
Line charts are most useful _______________.
when studying short-term trends
Correct
when studying long-term trends
when constructing charts using linear scaling
when constructing charts using semi-logarithmic scaling
Rationale
 when studying short-term trends
Incorrect. Line charts are the simplest representation of price data. They only provide information about two variables: price and time. In order to
study price action on shorter time trends, the technical analyst usually requires more information such as high, low, and open and close of prices,
none of which is shown on a line chart.
Rationale
 when studying long-term trends
Correct. When studying long-term trends, line charts can present a simple graphical presentation of the trend, especially if fewer data intervals, like
weekly data, are used.
Rationale
 when constructing charts using linear scaling
Incorrect. Line charts are not useful for constructing charts using linear scaling. The scale is the distance between price units which is used in
plotting charts. Linear scaling or arithmetic scaling means that each equal price interval is plotted equally. This means that a $1 change, for
example, would be plotted similarly whether the change was from 10 to 11 or from 100 to 101.
Rationale
 when constructing charts using semi-logarithmic scaling
Incorrect. Line charts are not useful for constructing charts using semi-logarithmic scaling. The scale is the distance between price units which is
used in plotting charts. Semi-logarithmic scaling is used, especially when plotting long-term price movements to better represent visually the
change in price on the chart.
Question 238
Identify the effect of corporate actions on price data
LOS: Identify the effect of corporate actions on price data
Difficulty: medium
Bloom Code: 1
If a stock opens at a much lower price than the previous day's close, and the number of shares has increased, it is most likely that a/an stock ________
occurred.
Correct
split
Your Answer
secondary offering
ex-dividend
reverse split
Rationale
 split
Correct: Splits cause prices to drop and consequently increase the number of traded shares.
Rationale
 secondary offering
Incorrect: A secondary offering will issue new shares, which necessarily dilutes the value of previously existing shares. It changes more than the
number of shares outstanding; therefore, it is not the correct choice.
Rationale
 ex-dividend
Incorrect: Ex-dividend refers to the date that determines who is entitled to the dividend payment. It would not likely lower the number of shares.
Rationale
 reverse split
Incorrect: Reverse splits create a higher price for a stock with lower volume.
Question 239
Explain two measures of dispersion: standard deviation and variance
LOS: Explain two measures of dispersion: standard deviation and variance
Difficulty: medium
Bloom Code: 2
Which statement about standard deviations, one of the measures of dispersion, is correct?
Your Answer
It preserves the compound nature of investment returns.
The difference between standard deviation and variance is that the latter is measured on the same scale as the mean.
It is the square root of the mean.

Correct
It measures how far a set of observations are scattered from their average.
Rationale
 It preserves the compound nature of investment returns.
Incorrect: Standard deviations do not preserve the compound nature of investment returns, that is a function of geometric mean. This is not a
correct statement regarding standard deviations.
Rationale
 The difference between standard deviation and variance is that the latter is measured on the same scale as the mean.
Incorrect: The difference between standard deviation and variance is that the latter is measured on the same scale as the mean, describes the
mean. This is not a correct statement regarding standard deviations.
Rationale
 It is the square root of the mean.
Incorrect: The variance is the square root of the standard deviation. This is not a correct statement regarding standard deviations.
Rationale
 It measures how far a set of observations are scattered from their average.
Correct: Standard deviation, generally represented as σ, measures how far a set of observations are scattered from their average.
Question 240
Identify general categories of informed and uninformed participants
LOS: Identify general categories of informed and uninformed participants
Difficulty: easy
Bloom Code: 2
Which of the following describes an informed market participant?
Your Answer
A senior Wall Street Journal reporter

Correct
Board members
An intern at a top-ranked hedge fund
A Bloomberg reporter on the NYSE floor
Rationale
 A senior Wall Street Journal reporter
Incorrect: Although reporters might get tips regarding news that relates to a company, or a piece of legislation that can impact markets in some
way, their access to material information is limited to that incident only and reflective of their status as being informed or uniformed. A reporter
would not be considered an informed market participant.
Rationale
 Board members
Correct: Board members are well informed when it comes to the companies on which they serve as board members.
Rationale
 An intern at a top-ranked hedge fund
Incorrect: Although hedge fund managers are thought of as informed market participants, interns are unlikely to have access to the same level of
information as their superiors. An intern would not be considered an informed market participant.
Rationale
 A Bloomberg reporter on the NYSE floor
Incorrect: News reporters and media anchors report the news and conduct interviews. They are unlikely to be informed market participants.
Although they might receive tips about a particular company, it is still unlikely that such tips would classify them as an informed market
participant.
Question 241
Difficulty: medium
Bloom Code: 1
Which statement best describes the difficulty in perceiving the significance of price moves at lower price levels and overemphasizing moves at higher
levels using an arithmetic chart?
Your Answer
The price is recorded on the vertical y-axis using varied price increments showing erratic price moves.
The vertical distance on the y-axis is adjusted to reflect significant moves.

Correct
A 50% increase in price from $1.00 to $1.50 and a 50% increase in price from $120 to $180 will not accurately display the importance of both price
moves.
The y-axis will display all price changes as percentage moves.
Rationale
 The price is recorded on the vertical y-axis using varied price increments showing erratic price moves.
Incorrect. Price increments using varied increments and showing erratic moves does not best describe the difficulty using arithmetic charts.
Rationale
 The vertical distance on the y-axis is adjusted to reflect significant moves.
Incorrect. The vertical y-axis is not adjusted to reflect significant moves.
Rationale
 A 50% increase in price from $1.00 to $1.50 and a 50% increase in price from $120 to $180 will not accurately display the importance of
both price moves.
Correct. Not only does the arithmetic chart make it difficult to perceive the significance of price moves at the lower price levels recorded on the
chart, but it can also overemphasize moves at the higher prices on the chart.
Rationale
 The y-axis will display all price changes as percentage moves.
Incorrect. Arithmetic charts do not display percentage changes on the vertical y-axis.
Question 242
Difficulty: easy
Bloom Code: 2
Which of the following describes the most favorable benefit of ETPs compared to mutual funds?
Correct
More favorable tax treatment
Offering investor exposure to different stocks
Exposure to professional money managers handling the investment
Public announcement of their results
Rationale
 More favorable tax treatment
Correct: Exchange-traded products were introduced to overcome problems mutual funds encountered. With exchange-traded products came more
favorable tax treatments.
Rationale
 Offering investor exposure to different stocks
Incorrect: Both mutual funds and ETPs own shares in various stocks, therefore, this is not the most favorable benefit of ETPs compared to mutual
funds.
Rationale
 Exposure to professional money managers handling the investment
Incorrect: Both mutual funds and ETPs hire professional money managers to manage the underlying portfolio. This not the favorable benefit of
ETPs compared to mutual funds.
Rationale
 Public announcement of their results
Incorrect: Both mutual funds and ETPs disclose their results, therefore, this is not the most favorable benefit of ETPs compared to mutual funds.
Question 243
Difficulty: medium
A ______________ describes the occurence when the breadth line does not reach a new high with new highs in the S&P 500.
Correct
negative divergence
confirmation
strong bullish market internal
bullish buy signal
Rationale
 negative divergence
Correct: A negative divergence occurs when the breadth line does not reach a new high with new highs in the S&P 500.
Rationale
 confirmation
Incorrect: A confirmation would not occur when the breadth line does not reach a new high with new highs in the S&P 500.
Rationale
 strong bullish market internal
Incorrect: A strong market internal would not occur when the breadth line does not reach a new high with new highs in the S&P 500.
Rationale
 bullish buy signal
Incorrect: A bullish buy signal would not occur when the breadth line does not reach a new high with new highs in the S&P 500.
Question 244
Describe challenges technicians face when using futures market data
LOS: Describe challenges technicians face when using futures market data
Difficulty: easy
Bloom Code: 2
Which of the following is a method to address issues with expiration and rollover of futures contracts? The method uses previous trading data adjusted
so that the end of one contract's reporting matches the start of the new contract's reporting.
Your Answer
Smoothing
Correct
Rollover with adjustment
Time rollover
Activity rollover
Rationale
 Smoothing
Incorrect: Smoothing methods require the vendor to create a synthetic continuous contract.
Rationale
 Rollover with adjustment
Correct: The rollover with adjustment method adjusts previous trading data so that the end of one contract's reporting matches the start of the new
contract's reporting. While this creates a smooth chart, all data prior to the current month's data is not real.
Rationale
 Time rollover
Incorrect: Time rollover simply splices together successive contracts.
Rationale
 Activity rollover
Incorrect: Activity rollover requires the data vendor to create an algorithm changing from near to next contract when the latter acquires higher
volume and/or open interest.
Question 245
Difficulty: medium
Nancy purchased XYZZ stock when it opened at $314. It closed the same day at $315 with a high of $317 and a low of $312. The next day XYZZ opened at
$313 and closed on its high at $316. Nancy determined the price action indicates that _______________.
Correct
the stock advanced
the stock declined
the stock was unchanged
confirmation has occurred
Rationale
 the stock advanced
Correct: The stock closed higher at $316 than the previous day at $315; therefore, it is advancing.
Rationale
 the stock declined
Incorrect: The stock did not decline.
Rationale
 the stock was unchanged
Incorrect: The stock was changed.
Rationale
 confirmation has occurred
Incorrect: Even though Nancy had expectations that the stock would rise, the answer "confirmation has occurred," is not the best answer.
Question 246
Difficulty: easy
Bloom Code: 1
Which statement regarding data intervals is correct?
Correct
Technical analysis can be applied to any time frame.
Technical analysis can be used only for shorter data intervals.
Technical analysis can be used only for longer data intervals.
The shortest data interval on a chart is 1 minute.
Rationale
 Technical analysis can be applied to any time frame.
Correct. The basic tools and principles of technical analysis can be applied to any time frame.
Rationale
 Technical analysis can be used only for shorter data intervals.
Incorrect. Technical analysis is not limited to only shorter data intervals.
Rationale
 Technical analysis can be used only for longer data intervals.
Incorrect. Technical analysis is not limited to only longer data intervals.
Rationale
 The shortest data interval on a chart is 1 minute.
Incorrect. Although not standard, data intervals on a chart could be less than 1 minute.
Question 247
Define random variable and the phrase “independent and identically distributed”
LOS: Define random variable and the phrase “independent and identically distributed”
Difficulty: easy
Bloom Code: 2
________________ variables are variables with the same probability distribution.
Your Answer
Independently distributed
Correct
Identically distributed
Normal distribution
Gaussian distribution
Rationale
 Independently distributed
Incorrect: Independently distributed variables are not variables with the same probability distribution.
Rationale
 Identically distributed
Correct: Identically distributed variables are variables with the same probability distribution. Using a coin flipping example, this means that if two
identical coins are flipped back-to-back, they each have the same probability of coming up heads.
Rationale
 Normal distribution
Incorrect: Normal distribution is not variables with the same probability distribution. Normal distribution is an expectation that observations will
only exceed two standard deviations above or below the mean 5% of the time.
Rationale
 Gaussian distribution
Incorrect: Gaussian distribution is not variables with the same probability distribution. It is a different name for normal distribution.
Question 248
Difficulty: medium
Dow, Hamilton, and Rhea observed that prices become more _____________ and unpredictable as time horizons decrease.
Correct
random
predictable
likely to follow the current trend
likely to start a new primary trend
Rationale
 random
Correct. Dow, Hamilton, and Rhea observed that price becomes more random and unpredictable as the time horizon shrinks.
Rationale
 predictable
Incorrect. Prices becoming more predictable was not the observation made by Dow, Hamilton, and Rhea.
Rationale
 likely to follow the current trend
Incorrect. Prices being more likely to follow the current trend was not the observation made by Dow, Hamilton, and Rhea.
Rationale
 likely to start a new primary trend
Incorrect. Prices becoming more likely to start a new primary trend was not the observation made by Dow, Hamilton, and Rhea.
Question 249
Difficulty: medium
Which statement is most correct when the market rallies to a new high, but the New Highs/New Lows line does not follow?
Your Answer
Bullish leadership is strong and the uptrend is likely to continue.

Correct
Bullish leadership is becoming weak and the uptrend is in danger.
Bearish leadership is about to overtake bullish leadership and the uptrend is about to reverse.
Bearish leadership has overtaken bullish leadership.
Rationale
 Bullish leadership is strong and the uptrend is likely to continue.
Incorrect: The NH/NL line will indicate that bullish leadership is strong if it also rallies to a new high in line with the market. It would not indicate
bullish leadership is strong and the uptrend likely to continue. Price advances should be supported by New Highs/New Lows.
Rationale
 Bullish leadership is becoming weak and the uptrend is in danger.
Correct: Bullish leadership is most likely becoming weak and the uptrend is in danger. This shows aBullish leadership is most likely becoming weak
and the uptrend is in danger. This shows a negative divergence and it is time to take profits on long positions.
Rationale
 Bearish leadership is about to overtake bullish leadership and the uptrend is about to reverse.
Incorrect: When the NH/NL line fails to confirm a price rally, it does not signal that bearish leadership is about to overtake bullish leadership or that
the uptrend is about to reverse. Divergence can take months to play out. Divergence could also produce false signals. Therefore, when you see
divergence, you should pay attention for possible changes in price behavior.
Rationale
 Bearish leadership has overtaken bullish leadership.
Incorrect: When the market rallies to a new high, but the New Highs/New Lows doesn't follow does not confirm bearish leadership has overtaken
bullish leadership. Price must always confirm.
Question 250
Difficulty: easy
Identify the correct statement regarding the secondary trend in Dow theory.
Correct
The secondary trend runs counter to the primary trend.

Your Answer
The secondary trend is a long-term trend.
Prices will retrace more than 66% of the gain that has occurred since the completion of the previous secondary uptrend.
The secondary trend is a decline in a bear market.
Rationale
 The secondary trend runs counter to the primary trend.
Correct. The secondary trend is an intermediate-term trend that runs counter to the primary trend.
Rationale
 The secondary trend is a long-term trend.
Incorrect. The secondary trend is not considered a long-term trend.
Rationale
 Prices will retrace more than 66% of the gain that has occurred since the completion of the previous secondary uptrend.
Incorrect. The price retracement is usually in a range of 33% to 66% of the primary price change since the termination of the last preceding
secondary reaction.
Rationale
 The secondary trend is a decline in a bear market.
Incorrect. A bear market would see a secondary uptrend.

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2/24/23, 9:36 PM CMTexcel - Level 1 - Assessment Review

(Advance / Decline ratio)/(Advancing volume / Declining volume) = TRIN

Hand-drawn charts allowed technicians to have a better feeling of risk.

Charts were used by fundamental analysts to examine the valuation of a security.

The third phase represents distress selling.

The duration can be up to several months.

The first phase represents selling due to decreased earnings.

A bull move is about to start

The bear move is nearing its end

The bear move has ended

Fractals are continuation candlestick patterns made up of five candlesticks.

Fractals are reversal candlestick patterns made up of five candlesticks.

Fractals are continuation candlestick patterns made up of three candlesticks.

Market that is fairly priced

Bar, line, candlestick

Volume, line, bar

Line, bar, point-and-figure

One might be biased toward periods of outperformance for a strategy.

A bar chart may omit the high price of the day.

A bar chart may omit the closing price of the day.

A bar chart may omit the opening price of the day.

The concept of randomness

Select the most accurate choice.

The most visually evident cycle on a chart is defined as the

technical analysis had no value

prices were never random

the EMH had a serious challenge

prices were most definitely random

Each candle on the horizontal axis represents one hour of trading.

Each bar on the horizontal axis will be the same height.

The market is bullish on this stock.

The market is bearish on this stock.

The stock is overvalued.

The stock is undervalued.

Heed the advice and buy.

Ignore the advice.

Look at technical indicators for shorting signals.

Research the fundamentals.

A measure of the distribution of variables

It measures the extent to which an event is likely to occur

A measure of the occurrence of different possible outcomes for a random variable

Price discounts everything.

Prices are usually at equilibrium.

Prices are non-random.

Charts allow investors to understand the supply and demand equilibrium.

Charts are only used by technical analysts.

are impossible to quantify and test

are predominantly equity-centric

have a delayed time between sentiment signals and a market turn

Favorable tax treatment

Reduced transaction cost

the advance/decline ratio.

advancing, declining, and unchanged issues.

new high and new low prices.

A decline in trading of large blocks of shares

Technicians not willing to reinterpret their tools

Anticipation of dividend payments

Fundamental business improvements