CFA Practice Question

CFA Practice Question

Which of the following are challenges to technical analysis?

I. Technical analysis involves a great deal of subjective judgement.
II. Technical analysis is heavily reliant on financial statements.
III. The majority of studies have supported the Weak Form Efficient Market Hypothesis.
IV. The standard rules that signal investment decisions can change over time.
V. The majority of studies have concluded that securities prices do not move in trends.
VI. Technical analysis assumes that supply-demand fluctuations lead to changes in securities prices.
A. I, III, IV
B. I, III, IV, V
C. I, III, IV, V, VI
Explanation: Of the choices listed, only II and VI are not criticisms of technical analysis. While VI appears correct, it is not. In fact, both fundamental and technical analysis recognize the importance of supply and demand fluctuations. The difference is that technical analysis assumes that supply and demand are influenced by both rational and irrational factors, whereas the EMH assumes that investors are rational. Had choice VI been phrased as "technical analysis assumes that supply-demand fluctuations, which are caused in part by irrational forces, are the only determinants of shifts in securities prices," then it would be correct in this example.

User Contributed Comments 4

User Comment
chandsingh I did not realise that the majority of studies refute trends in securities?
indrayudha neither did I.
darin3200 Page 649: Technicians study market trends and are mainly concerned with a security?s price trend: Is the security trading up, down, or sideways? Trends are driven by collective investor psychology, however, and can change without warning.
darin3200 Same page: Moreover, trends and patterns must be in place for some time before they are recognizable, so a key shortcoming of technical analysis is that it can be late in identifying changes in trends or patterns.
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