Stock Trading Case Studies & Practical Application 3

Question 1

A swing trader buys a stock at $80 and sets a price target of $100 with a stop-loss at $72. What is the reward-to-risk ratio?

Accepted Answer

2.5:1

Answer

Reward = $100 - $80 = $20; risk = $80 - $72 = $8; ratio = $20 / $8 = 2.5:1.

Question 2

An investor holds a highly concentrated position in a single tech stock that has tripled. Which strategy reduces concentration risk while deferring immediate tax liability?

Accepted Answer

Using an exchange fund or protective collar

Answer

An exchange fund allows diversification by pooling concentrated positions, while a collar uses options to limit downside without triggering immediate taxes.

Question 3

A company announces a 2-for-1 stock split. An investor who held 150 shares at $200 each now holds:

Accepted Answer

300 shares at $100

Answer

A 2-for-1 split doubles shares and halves price: 150 × 2 = 300 shares at $200 / 2 = $100 each.

Question 4

During the dot-com bubble, many traders ignored P/E ratios for tech stocks. Which behavioral bias best explains this?

Accepted Answer

Recency bias driving 'new paradigm' thinking

Answer

Recency bias led investors to believe recent rapid growth would continue indefinitely, justifying extreme valuations with a 'new paradigm' narrative.

Question 5

A trader enters a long position when MACD crosses above the signal line and exits when RSI exceeds 70. This is an example of:

Accepted Answer

A rules-based technical trading system

Answer

Using defined technical indicator crossovers for entry and exit signals defines a rules-based or systematic technical trading approach.

Stock Trading Practice Test

Stock Trading Practice Test

Stock Trading Case Studies & Practical Application 3