13.23 Review Questions
Chapter 13 of the CSC® Exam Prep Guide: Volume 2 delves into the intricacies of fundamental and technical analysis, two critical approaches for evaluating securities and making informed investment decisions. This section provides a comprehensive set of review questions designed to test your understanding of these concepts and encourage the application of knowledge through practical scenarios.
Understanding Fundamental Analysis
Fundamental analysis involves evaluating a company’s financial statements, management, competitive advantages, and market conditions to determine its intrinsic value. This approach is grounded in the belief that a security’s market price will eventually reflect its true value.
Key Concepts:
- Financial Statements: Balance sheets, income statements, and cash flow statements.
- Ratios: Price-to-earnings (P/E), return on equity (ROE), and debt-to-equity ratios.
- Economic Indicators: GDP growth, unemployment rates, and inflation.
- Qualitative Factors: Management quality, brand strength, and industry position.
Understanding Technical Analysis
Technical analysis focuses on statistical trends gathered from trading activity, such as price movement and volume. It is based on the idea that historical trading activity and price changes can be valuable indicators of future price movements.
Key Concepts:
- Charts: Line charts, bar charts, and candlestick charts.
- Indicators: Moving averages, relative strength index (RSI), and MACD.
- Patterns: Head and shoulders, double tops and bottoms, and triangles.
- Volume Analysis: Understanding the significance of trading volume in confirming trends.
Application of Concepts
To effectively apply these analytical methods, consider hypothetical scenarios that challenge your ability to interpret data and make investment decisions. For example, analyze a Canadian company’s financial statements to assess its investment potential or use technical indicators to predict future stock price movements.
Online Resources
For additional practice, the Canadian Securities Institute offers online quizzes and practice tests that can further enhance your understanding and readiness for the CSC® exam. These resources provide a valuable opportunity to apply your knowledge in a simulated exam environment.
Ready to Test Your Knowledge?
Practice 10 Essential CSC Exam Questions to Master Your Certification
### Which of the following is a key component of fundamental analysis?
- [x] Evaluating a company's financial statements
- [ ] Analyzing historical price patterns
- [ ] Using moving averages to predict trends
- [ ] Assessing trading volume
> **Explanation:** Fundamental analysis focuses on evaluating a company's financial health and intrinsic value through its financial statements.
### What does the Price-to-Earnings (P/E) ratio indicate?
- [x] The relationship between a company's stock price and its earnings per share
- [ ] The company's total revenue divided by its total assets
- [ ] The average price of the stock over a specific period
- [ ] The company's market capitalization divided by its book value
> **Explanation:** The P/E ratio measures how much investors are willing to pay per dollar of earnings, indicating the stock's valuation.
### In technical analysis, what does a "head and shoulders" pattern suggest?
- [x] A potential reversal in the current trend
- [ ] Continuation of the current trend
- [ ] A strong bullish signal
- [ ] A strong bearish signal
> **Explanation:** The head and shoulders pattern is a reversal pattern that can indicate a change in trend direction.
### Which economic indicator is commonly used in fundamental analysis to assess overall economic health?
- [x] Gross Domestic Product (GDP) growth
- [ ] Moving Average Convergence Divergence (MACD)
- [ ] Relative Strength Index (RSI)
- [ ] Bollinger Bands
> **Explanation:** GDP growth is a key economic indicator used to evaluate the overall health and growth of an economy.
### What is the primary focus of technical analysis?
- [x] Analyzing price movements and trading volumes
- [ ] Evaluating a company's management team
- [ ] Assessing economic indicators
- [ ] Reviewing financial statements
> **Explanation:** Technical analysis focuses on analyzing price movements and trading volumes to predict future price trends.
### Which of the following is a qualitative factor in fundamental analysis?
- [x] Management quality
- [ ] Price-to-Earnings (P/E) ratio
- [ ] Moving averages
- [ ] Trading volume
> **Explanation:** Qualitative factors in fundamental analysis include aspects like management quality, which are not easily quantifiable.
### What does the Relative Strength Index (RSI) measure in technical analysis?
- [x] The speed and change of price movements
- [ ] The average price of a stock over a specific period
- [ ] The company's earnings growth rate
- [ ] The company's debt-to-equity ratio
> **Explanation:** RSI measures the speed and change of price movements, indicating overbought or oversold conditions.
### In fundamental analysis, what does the debt-to-equity ratio indicate?
- [x] The proportion of a company's financing that comes from debt versus equity
- [ ] The company's earnings per share
- [ ] The average stock price over a specific period
- [ ] The company's market capitalization
> **Explanation:** The debt-to-equity ratio indicates the proportion of a company's financing that comes from debt compared to equity.
### Which chart type is commonly used in technical analysis to display price movements over time?
- [x] Candlestick chart
- [ ] Balance sheet
- [ ] Income statement
- [ ] Cash flow statement
> **Explanation:** Candlestick charts are commonly used in technical analysis to display price movements over time.
### True or False: Technical analysis assumes that all known information is already reflected in the stock price.
- [x] True
- [ ] False
> **Explanation:** Technical analysis is based on the assumption that all known information is already reflected in the stock price, and price movements follow trends.
By engaging with these review questions, you can solidify your understanding of fundamental and technical analysis concepts and better prepare for the CSC® exam. Remember to explore additional resources and practice tests offered by the Canadian Securities Institute to further enhance your exam readiness.