WMS Market Analysis & Trends 3 — Questions and Answers
Question 1: A wealth manager notices that a client's portfolio has a beta of 1.4. This means the portfolio is expected to:
- Outperform the market by 40% annually
- Move 40% more than the market in either direction (Correct answer)
- Generate 40% higher returns than Treasury bills
- Have a 40% greater Sharpe ratio than the benchmark
Correct answer: Move 40% more than the market in either direction
Beta measures sensitivity to market movements; a beta of 1.4 means the portfolio tends to move 40% more than the market benchmark, up or down.
Question 2: Which of the following best describes the 'wealth effect' in macroeconomic analysis?
- Higher savings rates lead to increased capital investment
- Rising asset prices increase consumer confidence and spending (Correct answer)
- Wealth inequality reduces aggregate demand over time
- Tax cuts for high earners stimulate business investment
Correct answer: Rising asset prices increase consumer confidence and spending
The wealth effect describes how rising asset prices (stocks, real estate) make consumers feel wealthier, increasing their willingness to spend.
Question 3: In sector rotation theory, which sectors tend to outperform EARLY in an economic expansion?
- Utilities and consumer staples
- Energy and materials
- Financials and consumer discretionary (Correct answer)
- Healthcare and technology
Correct answer: Financials and consumer discretionary
Financials benefit from rising credit demand early in expansions, and consumer discretionary benefits as consumer confidence and spending recover.
Question 4: The VIX index measures market expectations of volatility for which time horizon?
- 10 trading days
- 30 calendar days (Correct answer)
- 90 calendar days
- 12 months
Correct answer: 30 calendar days
The VIX, often called the 'fear gauge,' measures implied volatility of S&P 500 options over the next 30 calendar days.
Question 5: A client asks about the 'Rule of 20' in equity valuation. This rule suggests stocks are fairly valued when:
- P/E ratio equals 20
- P/E ratio plus inflation rate equals 20 (Correct answer)
- Earnings growth rate equals 20%
- Dividend yield plus P/E ratio equals 20
Correct answer: P/E ratio plus inflation rate equals 20
The Rule of 20 states that stocks are fairly valued when the P/E ratio plus the current inflation rate equals approximately 20.
Question 6: Which of the following is an example of a coincident economic indicator?
- Stock market index level
- Personal income (Correct answer)
- New orders for manufactured goods
- Consumer confidence index
Correct answer: Personal income
Personal income is a coincident indicator because it moves roughly in line with the overall economy in real time.
Question 7: A 'bear trap' in technical analysis occurs when:
- A support level holds after a brief breakdown, catching short sellers (Correct answer)
- A resistance level is broken but quickly reverses downward
- A trend reversal is confirmed by high trading volume
- A bearish candlestick pattern follows a long uptrend
Correct answer: A support level holds after a brief breakdown, catching short sellers
A bear trap is a false breakdown below support that quickly reverses upward, trapping short sellers who bet on continued decline.
WMS Market Analysis & Trends 3
A wealth manager notices that a client's portfolio has a beta of 1.4.
This means the portfolio is expected to: