Short-Interest Ratio | CFA® Level 1 Exam

Short-Interest Ratio

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Question

The short-interest ratio is equal to

Answers

A. the outstanding short interest on an exchange divided by the daily volume of trading on the exchange. A low short-interest ratio would be interpreted by technical analysts as a bearish sign, because of the small potential demand for stocks by those who have sold short by not yet covered their sales.

B. the outstanding short interest on an exchange divided by the daily volume of trading on the exchange. A high short-interest ratio would be interpreted by technical analysts as a bearish sign, because a large amount of short sales indicates investors' expectations of declining share prices.

C. the outstanding short interest on an exchange divided by the market capitalization of shares on the exchange. A low short-interest ratio would be interpreted by technical analysts as a bullish sign, because a small amount of short sales indicates investors' expectations of rising share prices.

D. the outstanding short interest on an exchange divided by the number of long positions held. A high short-interest ratio would be interpreted by technical analysts as a bullish sign, because of the large potential demand for stocks by those who have sold short but not yet covered their sales. A

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Explanations

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A. B. C. D.

Explanation

Technical analysts interpret the short-interest ratio contrary to initial intuition. Because short sales reflect investors' expectations of declining share prices, a large amount of short sales might be taken as a bearish sign. But technical analysts prefer to focus on the potential demand for shares that short sales create. Once an investor has sold short a stock, he will eventually have to repurchase it to cover his position.

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