Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Concept explainers
Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
Question
How can you chart and predict falling or rising wedges for stocks?
Transcribed Image Text:## Understanding Wedges in Stock Charts
Wedges are chart patterns used in technical analysis to predict future price movements in the stock market. They are formed by converging trend lines that represent the range within which a stock is trading. Wedges can indicate reversals or continuations in price trends.
### Types of Wedges:
1. **Falling Wedges**
- **Description:** This pattern forms when the price trend is downward, but the range narrows over time, creating a wedge shape.
- **Price Movement:** Prices typically break upwards.
- **Behavior:** Indicates that the current downward trend may reverse into an upward trend.
2. **Rising Wedges**
- **Description:** This pattern appears when the price trend is upward, but the range narrows, also forming a wedge shape.
- **Price Movement:** Prices usually break downwards.
- **Behavior:** Suggests a reversal where the current upward trend may shift downwards.
### Key Insight:
- **Price Movement:** Prices tend to move in the opposite direction to the wedge's slope.
- **Trend Reversal:** Both falling and rising wedges are often indicative of an upcoming trend reversal—falling wedges suggest a bullish reversal, while rising wedges indicate a bearish reversal.
Understanding these patterns can be crucial for investors who use technical analysis to inform their trading decisions, as recognizing a wedge formation early can provide an opportunity to predict future price movements accurately.
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