Stock Trading Research & Evidence-Based Practice 5

Question 1

The 'disposition effect' in behavioral finance research describes investors' tendency to:

Accepted Answer

Hold losing positions too long and sell winning positions too early

Answer

The disposition effect is the empirically documented bias where investors hold losers to avoid realizing a loss while selling winners prematurely to lock in gains.

Question 2

When a research paper states a strategy has a Calmar ratio of 2.5, this means:

Accepted Answer

The annualized return is 2.5 times the maximum drawdown

Answer

The Calmar ratio divides annualized return by maximum drawdown; a ratio of 2.5 means the strategy earned 2.5 dollars of return for every dollar of peak-to-trough loss.

Question 3

What is the primary limitation of using only backtested results when evaluating a quantitative trading strategy?

Accepted Answer

Historical conditions may not repeat, and backtest results cannot guarantee future performance

Answer

Backtests are inherently backward-looking; market regimes, liquidity, and correlations change, so past performance patterns may not persist in the future.

Question 4

Which concept explains why widely-known market anomalies often disappear after academic publication?

Accepted Answer

The arbitrage principle — informed traders exploit and eliminate the mispricing

Answer

Once an anomaly is published, arbitrageurs flood in to exploit it, increasing competition until the excess returns are eliminated and the anomaly disappears.

Question 5

A researcher applies a rolling 12-month analysis to evaluate a strategy. What advantage does this approach offer over a single fixed period?

Accepted Answer

It assesses performance across many different market environments, reducing period-specific bias

Answer

Rolling analysis examines performance across overlapping windows, capturing a variety of market regimes and reducing the risk of conclusions being skewed by a uniquely favorable or unfavorable period.

Stock Trading Practice Test

Stock Trading Practice Test

Stock Trading Research & Evidence-Based Practice 5