Stock Trading Research & Evidence-Based Practice 2

Question 1

Which statistical measure best describes the average annual return of a stock over multiple years when compounding is considered?

Accepted Answer

Geometric mean

Answer

The geometric mean accounts for compounding and provides the true average annual growth rate over multiple periods.

Question 2

What does a p-value of 0.03 indicate when backtesting a trading strategy?

Accepted Answer

There is a 3% probability the results occurred by chance

Answer

A p-value of 0.03 means there is only a 3% probability that the observed results are due to random chance, suggesting statistical significance.

Question 3

Which source is most likely to provide peer-reviewed empirical research on stock market anomalies?

Accepted Answer

The Journal of Finance

Answer

Academic journals like the Journal of Finance publish peer-reviewed research that has been vetted by experts for methodological rigor.

Question 4

What is 'data snooping bias' in the context of strategy research?

Accepted Answer

Finding patterns by testing so many variables that results appear significant by chance

Answer

Data snooping bias occurs when researchers test so many combinations that spurious patterns appear statistically significant purely by chance.

Question 5

Which research approach tests a trading hypothesis on data that was NOT used to develop it?

Accepted Answer

Out-of-sample testing

Answer

Out-of-sample testing validates a strategy on unseen data to confirm whether its edge holds beyond the development dataset.

Stock Trading Practice Test