Question

The phenomenon that recent “winner stocks” (stocks that outperform) tend to continue to outperform recent “loser stocks” (stocks that underperform) is known as:

• A. The size effect.
• B. Momentum.
• C. The value effect
• D. The calendar effect.

Answer 1

Sol :

Answer - B. Momentum

The phenomenon that recent “winner stocks” (stocks that outperform) tend to continue to outperform recent “loser stocks” (stocks that underperform) is known as Momentum effect.

The momentum effect states that the stocks which have outperformed the market in the recent past would continue to outperform in the short term future. On the other hand, stocks which have underperformed the market in the recent past would continue to underperform in the short term future.This results in a profitable strategy of buying past winners and selling past losers. Momentum effect works for small as well as large cap stocks. As per studies momentum effect is generally more profitable on the long (buy) side rather than on the short (sell) side of the market.