CFA® Level 1: Understanding the Confidence Index

The Confidence Index

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Question

The confidence index is equal to the ratio of

Answers

A. the yield on 10 top-grade corporate bonds divided by the yield on the Dow Jones average of 40 bonds, multiplied by 100.

B. the yield on the Dow Jones average of 40 bonds divided by the average yield on 10 top-grade corporate bonds, multiplied by 100.

C. the expected return on the S&P 500 divided by the yield on 10 top-grade corporate bonds, multiplied by 100.

D. the yield on the Dow Jones average of 40 stocks divided by the expected return on the S&P 500.

E. the expected return on the S&P 500 divided by the yield on the Dow Jones average of 40 stocks.

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Explanations

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A. B. C. D. E.

The confidence index measures the yield spread between high-grade bonds and a large cross section of bonds. Some technical analysts believe that during periods of high confidence, investors are more willing to invest in lower-quality bonds, thereby pushing down their yields, and increasing the confidence index. An increase in the index is viewed as a bullish sign.

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