Momentum investing is a strategy that seeks to capitalize on the continuance of existing trends in the market. It involves buying securities that have been performing well and selling those that have been performing poorly, with the expectation that the trends will continue. This approach is based on the belief that market participants often underreact to new information, causing trends to persist longer.
Which of the following best describes momentum investing?
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A) This describes value investing. B) This describes growth investing. C) Momentum investing involves buying securities with strong recent performance and selling those with poor performance, expecting trends to continue. D) This describes contrarian investing.
What is a key assumption of momentum investing?
A) This assumption contradicts the basis of momentum investing. B) Momentum investing is based on the belief that market participants often underreact to new information, causing trends to persist longer. C) This assumption is more related to contrarian investing. D) This assumption contradicts the basis of momentum investing.
Which technical analysis tool is commonly used in momentum investing to help identify trends?
A) Price-to-earnings ratio is a fundamental analysis tool. B) Dividend yield is a fundamental analysis tool. C) Moving averages are widely used in technical analysis to help identify trends and smooth out price fluctuations. D) Book value is a fundamental analysis tool.
In the late 1990s, momentum investing became particularly popular during the dot-com bubble, as investors chased after rapidly rising technology stocks. Unfortunately, this led to a significant overvaluation of many tech companies, eventually resulting in a sharp market correction when the bubble burst in 2000.
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Example Series 65 Example Practice Question
A momentum investor might notice that a particular stock has consistently outperformed the market over the past six months. Believing that this trend will continue, the investor decides to purchase shares of the stock, expecting to sell them at a higher price in the future.