Stock Trading Case Studies & Practical Application 5

Question 1

A day trader makes 10 trades per day, each risking $50, with a 55% win rate and 1:1 reward-to-risk. After commissions of $5 per trade, is this strategy net profitable?

Accepted Answer

No, commissions eliminate the edge

Answer

Daily edge = 10 trades × [(0.55×$50) - (0.45×$50)] = $10; commissions = 10×$5 = $50, leaving a -$40 net loss per day.

Question 2

The SEC's Regulation SHO requires short sellers to locate shares before shorting. A broker fails to deliver shares on settlement day. This is called:

Accepted Answer

A naked short sale or fail-to-deliver

Answer

A fail-to-deliver occurs when the seller cannot provide shares by settlement, which may indicate naked short selling violating Reg SHO.

Question 3

A trader backtests a strategy on the same data used to develop it and gets excellent results. When live-trading, performance is much worse. This is known as:

Accepted Answer

Curve fitting or overfitting

Answer

Overfitting (curve fitting) occurs when a model is tuned so precisely to historical data that it captures noise rather than true signal, failing out-of-sample.

Question 4

In the 2020 COVID crash, markets fell 34% in 23 days but fully recovered within months. An investor who panic-sold at the bottom and re-entered at the top would have:

Accepted Answer

Locked in losses and missed the recovery gains

Answer

Selling at the bottom realizes losses permanently, and re-entering at the top misses the recovery, resulting in significant underperformance versus holding.

Question 5

A company repurchases 10% of its outstanding shares. All else equal, what happens to earnings per share (EPS)?

Accepted Answer

EPS increases because fewer shares divide the same earnings

Answer

With 10% fewer shares outstanding, the same total earnings are divided among fewer shares, mechanically increasing EPS.

Stock Trading Practice Test

Stock Trading Practice Test

Stock Trading Case Studies & Practical Application 5