Stock Trading Research & Evidence-Based Practice 4

Question 1

Which type of research study design provides the strongest causal evidence for a trading strategy's effectiveness?

Accepted Answer

Randomized controlled experiment on live trading accounts

Answer

A randomized controlled experiment isolates causation by randomly assigning conditions, making it the gold standard for causal inference in empirical research.

Question 2

A stock's R-squared value of 0.85 against the S&P 500 indicates that:

Accepted Answer

85% of the stock's price variance is explained by movements in the S&P 500

Answer

R-squared measures the proportion of a security's variance explained by the benchmark; 0.85 means 85% of its movement is attributable to the index.

Question 3

What is 'publication bias' and how does it affect trading strategy research?

Accepted Answer

The tendency for journals to publish only strategies with positive results, overstating their prevalence

Answer

Publication bias skews research because journals favor statistically significant positive findings, making trading edges appear more common than they truly are.

Question 4

Which of the following is an example of anchoring bias in stock research?

Accepted Answer

Selling a stock as soon as it returns to the original purchase price

Answer

Anchoring bias causes investors to fixate on the purchase price as a reference point, leading to irrational decisions like waiting for break-even before selling.

Question 5

What does the January Effect research anomaly suggest about small-cap stock returns?

Accepted Answer

Small-cap stocks tend to outperform in January, possibly due to tax-loss selling reversals in December

Answer

The January Effect describes the historical tendency for small-cap stocks to outperform in January, often attributed to buying pressure after December tax-loss selling.

Stock Trading Practice Test

Stock Trading Practice Test

Stock Trading Research & Evidence-Based Practice 4