Moving Averages

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The five-week moving average figure is calculating using the last five weekly prices and dividing by five.

In this video, I’m going to work through a question that demonstrates why practice should play an important role in your exam preparation journey. It’s also important to have the right attitude. Have fun with the process. Remember, when you do a practice question, one of two things will happen. You’ll get it right, which is awesome, or you’ll get it wrong, which is also awesome because it represents a learning opportunity. Keep in mind, you’re not doing practice questions to score 100%. I mean, if you are scoring that high, great. Go write your exam. But during the study process, it’s all about figuring out what you don’t know. You’re doing practice questions to learn. Never lose sight of that.

This question asks what would need to happen to the stock price in week eight for the five-week moving average to increase? I dug into our learning management system and looked at the statistics behind this question to try and figure out why students were getting it wrong. I can tell that many of you must have saw the week seven price of $14 and thought, well, it would have to be more than that in week eight. Picked greater than $14, which was likely the first answer that jumped out at you, and got it wrong. Others pulled out their calculators, started crunching numbers, which isn’t required, and also got it wrong. There is one nugget of knowledge and a little practice that will help you answer a question like this correctly.

The five-week moving average figure is calculating using the last five weekly prices and dividing by five. So when calculating the five-week moving average figure for week seven, we include the last five weekly prices, which are weeks three to seven. Now, take note of what happens for the week eight calculation. The week three price of $9 is dropped from the average and the week eight price is added in its place. So for the week eight moving average to increase, the new figure, week eight must be bigger than the week three figure that is being dropped. It’s that simple. So we select the answer greater than $9, and we are correct.

Like I said at the beginning of this video, if you got it wrong, so what? Tip your hat to the author of this question. Say thank you. You’re welcome by the way. And learn from your mistake and don’t make it again. This is why you practice.