CFA® Level 1: CFA® Level 1 Exam - The Confidence Index

The Confidence Index

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The confidence index -

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A. is equal to Barron's average yield on 10 top-grade bonds divided by the yield on the Dow Jones average of 40 bonds, multiplied by 100. Technical analysts who try to follow the "smart money" would view the confidence index as a bullish indicator; an increase in its value is a bullish sign.

B. is equal to Barron's average yield on 10 top-grade bonds divided by the yield on the Dow Jones average of 100 bonds, multiplied by 100. Technical analysts who try to follow the "smart money" would view the confidence index as a bearish indicator; an increase in its value is a bearish sign.

C. is equal to the yield on the Dow Jones average of 40 bonds divided by Barron's average yield on 40 topgrade bonds, multiplied by 100. Technical analysts who try to follow the "smart money" would view index values of under 100 to be bearish, and index values over 100 to be bullish.

D. is equal to the yield on the Dow Jones average of 80 bonds divided by Barron's average yield on 80 topgrade bonds, multiplied by 100. Technical analysts who try to follow the "smart money" would view the index as a bullish indicator; an increase in its value is a bullish sign.

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A. B. C. D.

The confidence index measures the yield spread between high-grade bonds (Barron's 10 top-grade bonds) and a large cross section of bonds (the Dow Jones average of 40 bonds). The yields on high-grade bonds should always be lower than the average on a wide cross-section, so the index should always have a value below 100. During periods of high confidence, investors are willing to invest more in low-quality bonds, causing their yields to decrease relative to the yields on high-grade bonds. So when confidence is high, the value of the index increases.

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