CSC Fundamental and Technical Analysis 4 — Questions and Answers
Question 1: Which technical indicator measures the rate of change in a security's price momentum?
- Simple moving average
- MACD (Moving Average Convergence Divergence) (Correct answer)
- Bollinger Bands
- On-balance volume
Correct answer: MACD (Moving Average Convergence Divergence)
MACD measures momentum by showing the relationship between two exponential moving averages, with crossovers signaling potential trend changes.
Question 2: In fundamental analysis, the quick ratio excludes which current asset?
- Cash and cash equivalents
- Accounts receivable
- Inventory (Correct answer)
- Short-term investments
Correct answer: Inventory
The quick ratio excludes inventory because it may not be quickly convertible to cash, providing a more conservative liquidity measure than the current ratio.
Question 3: Fundamental analysts use the DuPont formula to decompose return on equity into which three components?
- Revenue growth, margin expansion, and dividend yield
- Net profit margin, asset turnover, and financial leverage (Correct answer)
- Earnings per share, book value, and payout ratio
- Operating income, EBITDA, and free cash flow
Correct answer: Net profit margin, asset turnover, and financial leverage
The DuPont formula breaks ROE into net profit margin × asset turnover × equity multiplier (leverage), revealing drivers of profitability.
Question 4: In technical analysis, 'volume' is most useful for:
- Setting a stock's intrinsic value
- Confirming the strength or weakness of a price move (Correct answer)
- Predicting dividend announcements
- Calculating earnings per share
Correct answer: Confirming the strength or weakness of a price move
Volume confirms price movements — a breakout on high volume is more reliable than one on low volume, as it indicates broader market participation.
Question 5: Which of the following is an example of a leading economic indicator used in top-down fundamental analysis?
- Unemployment rate
- GDP growth (previous quarter)
- Building permits issued (Correct answer)
- Corporate profit margins reported last quarter
Correct answer: Building permits issued
Building permits are a leading indicator because they predict future construction activity before it occurs, unlike lagging indicators like unemployment.
Question 6: A 'double bottom' chart pattern signals:
- Continuation of a downtrend
- A potential bullish reversal (Correct answer)
- A period of consolidation with no directional bias
- An impending stock split
Correct answer: A potential bullish reversal
A double bottom forms when price touches a support level twice and then rallies, signaling a potential reversal from a downtrend to an uptrend.
Question 7: In earnings analysis, 'operating leverage' refers to the degree to which a company relies on:
- Debt financing to fund operations
- Fixed costs versus variable costs in its cost structure (Correct answer)
- Dividend payments to attract investors
- Foreign currency hedging strategies
Correct answer: Fixed costs versus variable costs in its cost structure
Operating leverage measures how fixed costs amplify the impact of revenue changes on operating income — higher fixed costs mean greater operating leverage.
CSC Fundamental and Technical Analysis 4
Which technical indicator measures the rate of change in a security's price momentum?