Relative Strength Ratios: Explained | CFA Level 1 Test Prep

Relative Strength Ratios

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Question

Which of the following statements about relative strength ratios is correct?

Answers

A. In an increasing market, a stock price has to increase faster than the general market for its relative strength ratio to increase. Relative strength ratios, however, do not work during stagnant or declining markets.

B. In an increasing market, a stock price has to increase faster than the general market for its relative strength ratio to increase. In a declining market, a stock price only has to increase in order for that ratio to increase.

C. A high relative strength index that has not changed much over time would be interpreted as a bullish sign by technical analysts. A high ratio value that has started declining would be viewed with caution, however.

D. In an increasing market, a stock price has to increase faster than the general market for its relative strength ratio to increase. In a declining market, a stock price only has to decline slower than the general market in order for that ratio to increase. D

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Explanations

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A. B. C. D.

Explanation

Technical analysts believe that a stock or industry that is outperforming the market will continue to do so. Relative strength ratios are computed to find such trends.

The ratios are equal to the price of the stock, or stocks in the industry group, relative to the value of some stock market series. If the ratio increases over time, the stock or industry has beenoutperforming the market.

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