Stock Trading Research & Evidence-Based Practice 3

Question 1

Which of the following best describes the Efficient Market Hypothesis (EMH) in its strong form?

Accepted Answer

Prices reflect all public and private (insider) information

Answer

The strong form of EMH asserts that stock prices already incorporate all information, including insider knowledge, making it impossible to consistently earn excess returns.

Question 2

A trader finds that a momentum strategy generated 18% annual returns in backtest but only 6% in live trading. This discrepancy is most likely due to:

Accepted Answer

Overfitting the strategy to historical data

Answer

When backtest performance greatly exceeds live performance, the strategy was likely overfit to historical data and does not generalize to new market conditions.

Question 3

Which metric measures the largest peak-to-trough decline in a portfolio's value during a specific period?

Accepted Answer

Maximum drawdown

Answer

Maximum drawdown quantifies the worst loss from a portfolio's peak to its subsequent trough, reflecting downside risk during the measurement period.

Question 4

What does the Fama-French three-factor model add to the traditional CAPM model?

Accepted Answer

Size and value factors

Answer

The Fama-French model extends CAPM by adding small-cap size (SMB) and high book-to-market value (HML) factors to better explain cross-sectional stock returns.

Question 5

When evaluating a stock research report, which element most indicates potential bias?

Accepted Answer

Disclosure that the analyst's firm holds shares in the rated company

Answer

A conflict of interest disclosure — such as the analyst's firm holding the stock — is a key red flag for potential bias in a research report.

Stock Trading Practice Test

Stock Trading Practice Test

Stock Trading Research & Evidence-Based Practice 3