Go to www.mhhe.com/bkm and link to the material for Chapter 9, where you will find five years of weekly returns for the S&P 500 and Fidelity’s Select Banking Fund (ticker FSRBX).

a. Set up a spreadsheet to calculate the relative strength of the banking sector compared to the broad market. (Hint: as in the previous problem, set the initial value of the sector index and the S&P 500 Index equal to 100, and use each week’s rate of return to update the level of each index.)

b. Identify every instance in which the relative strength ratio increases by at least 5%

from its value five weeks earlier. In how many of the weeks immediately following a substantial increase in relative strength does the banking sector outperform the S&P 500? In how many of those weeks does the banking sector underperform the S&P 500?

c. Identify every instance in which the relative strength ratio decreases by at least 5% from its value five weeks earlier. In how many of the weeks immediately following a substantial decrease in relative strength does the banking sector underperform the S&P 500? In how many of those weeks does the banking sector outperform the S&P 500?

d. How well does the relative strength rule perform in identifying buy or sell opportunities?

Challenge LO.1