CFA CFA Level 1 CFA Level 1 Question of the Week – Quantitative Methods

CFA Level 1 Question of the Week – Quantitative Methods

  • This topic has 3 replies, 3 voices, and was last updated Sep-19 by kalalah.
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  • Matt_AnalystPrep
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    In which of the following situations will a contrarian investor purchase a security based on a Bollinger bands analysis?

    • A. When the security price reaches the upper band of the Bollinger bands.
    • B. When the security price reaches the lower band of the Bollinger bands.
    • C. When the range between the upper band and the lower band of the
      Bollinger bands becomes wider.
    excelmonkey
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    @Matt_AnalystPrep Aren’t Bollinger bands meant to be inconclusive? i.e. you can’t or shouldn’t make an investment decision purely based on Bollinger bands analysis?

    Matt_AnalystPrep
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    The correct answer is B.

    A contrarian investor acts contrary to the market trend. When the prices of security reach the upper band of the Bollinger bands, a contrarian sells the security, and he buys the security when the price of the security reaches the lower band of the Bollinger bands.

    kalalah
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    @excelmonkey from CFA curriculum: 

    The more volatile the security being analyzed becomes, the wider the range becomes between the two outer lines or bands. Similar to moving averages, Bollinger Bands can be used to create trading strategies that can be easily computerized and tested. A common use is as a contrarian strategy, in which the investor sells when a security price reaches the upper band and buys when it reaches the lower band. This strategy assumes that the security price will stay within the bands.

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