General Securities Representative (Series 7) Practice Exam

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An advance-decline ratio measures what aspect of the market?

  1. Volatility of stocks

  2. Market capitalization

  3. Breadth of the market

  4. Sector performance

The correct answer is: Breadth of the market

The advance-decline ratio is a key indicator that assesses the breadth of the market by comparing the number of advancing stocks to the number of declining stocks over a specific period. A higher ratio suggests that a larger proportion of stocks are participating in upward movements, indicating a strong market breadth and potentially bullish sentiment. Conversely, a lower ratio reflects more declining stocks, suggesting weakness or bearish sentiment in the market. This measure helps investors gauge the overall health of a market rally or decline. If the majority of stocks are advancing along with a market index moving higher, it reinforces the sustainability of the upward trend. On the other hand, if the market index is rising while fewer stocks are advancing, it might signal an underlying weakness. By focusing on the number of advancing versus declining stocks, the advance-decline ratio provides insights into market participation and sentiment, making it a valuable tool for assessing market dynamics.

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