Stock Trading Case Studies & Practical Application 2

Question 1

An investor bought 100 shares of XYZ at $50. The stock drops to $40 and they buy 100 more shares. What is their new average cost basis per share?

Accepted Answer

$45.00

Answer

Averaging down: (100×$50 + 100×$40) / 200 shares = $9,000 / 200 = $45 per share.

Question 2

A trader uses a 2% risk rule and has a $50,000 account. They enter a trade at $100 with a stop-loss at $95. How many shares can they buy?

Accepted Answer

200 shares

Answer

Max risk = $50,000 × 2% = $1,000; risk per share = $100 - $95 = $5; shares = $1,000 / $5 = 200.

Question 3

In 2008, Lehman Brothers' bankruptcy triggered a market-wide sell-off. Which trading strategy would have best protected a long-only equity portfolio?

Accepted Answer

Buying put options as portfolio insurance

Answer

Protective puts provide downside insurance, capping losses while maintaining upside exposure during market crashes.

Question 4

A stock gaps up 8% at the open on an earnings beat but then reverses and closes flat. This pattern is called:

Accepted Answer

A gap and crap (fade)

Answer

A 'gap and crap' or fade occurs when a strong open reverses during the session, closing near the prior day's price.

Question 5

Jesse Livermore famously profited during the 1929 crash by short selling. What key risk does short selling carry that long positions do not?

Accepted Answer

Losses are theoretically unlimited

Answer

A stock can only fall to zero (capping long losses) but can rise indefinitely, making short-selling losses theoretically unlimited.

Stock Trading Practice Test