Certified Financial Management Specialist Practice Exam

What strategy involves buying or selling assets based on predictions of market movements?

1. Value Investing

2. Market Timing

3. Passive Investing

4. Dollar-Cost Averaging

The correct answer is: Market Timing

Market timing is a strategy that focuses on making investment decisions based on predictions about future market movements. This approach relies on analyzing market trends, economic indicators, and other signals to determine the best times to buy or sell assets. The goal is to capitalize on these predicted movements to maximize returns or mitigate losses. Investors employing a market timing strategy attempt to enter the market when they believe prices are low and exit when they expect prices to fall, thereby enhancing their investment performance. This strategy contrasts with other approaches, such as value investing, which emphasizes buying undervalued assets regardless of short-term market trends, or passive investing, where the objective is to build a diversified portfolio and hold it over the long term without attempting to predict market fluctuations. Dollar-cost averaging also differs as it involves consistently investing a fixed amount over time, regardless of market conditions, aiming to reduce the impact of volatility rather than timing market entry and exit points.