Challenges to Technical Analysis in CFA Level 1 Exam

Challenges to Technical Analysis

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Question

Which of the following are challenges to technical analysis? Choose the best answer.

I.The majority of studies have concluded that securities prices do not move in trends.

II. Technical analysis assumes that supply-demand fluctuations lead to changes in securities prices.

III. Technical analysis is heavily reliant on subjective judgement.

IV. Technical analysis assumes that supply and demand are partially influenced by irrational factors, and that supply and demand fluctuations are the only determinant of shifts in securities prices.

V. The majority of studies have supported the weak-form Efficient Market Hypothesis. VI. The standard rules that signal investment decisions can change over time.

VII. Technical analysis is heavily reliant on financial statements.

Answers

A. I, II, III, IV, V, VI, VII

B. None of these choices represents the best possible answer.

C. I, III, IV, V, VII

D. II, III, IV, V, VI, VII

E. I, II, III, V, VI

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Explanations

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A. B. C. D. E.

None of these answers are completely correct. Of the choices listed, only II and VII are incorrect. While II appears correct, it is not. In fact, both fundamental and technical analyses 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. Further, technical analysis assumes that supply and demand fluctuations are the sole cause of shifts in securities prices.

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