Reading 41: Execution of Portfolio Decisions－LOS l motivation, classes, discuss

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CFA Institute Area 3-5, 7, 12, 14-18: Portfolio Management
Session 14: Execution of Portfolio Decisions
Reading 41: Execution of Portfolio Decisions
LOS l: Explain the motivation for algorithmic trading and discuss the basic classes of algorithmic trading strategies.

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A simple logical participation strategy trades:

A) with market flow and attempts to minimize market impact.

B) early in the day and attempts to minimize market impact.

C) early in the day and attempts to minimize opportunity costs.

D) with market flow and attempts to minimize opportunity costs.

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Answer and Explanation

Simple logical participation strategies seek to trade with market flow to minimize market impact.

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A shortfall implementation strategy trades:

A) early in the day and attempts to maximize trading cost volatility.

B) with market flow and attempts to maximize trading cost volatility.

C) with market flow and attempts to minimize opportunity costs.

D) early in the day and attempts to minimize opportunity costs.

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Answer and Explanation

Implementation shortfall strategies trade heavier early in the day to ensure order completion, reduce opportunity costs, and minimize the volatility of trading costs.

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A trader must trade an entire portfolio of stocks. Which of the following would be the best strategy to pursue?

A) An implementation shortfall strategy.

B) A simple logical participation strategy based on VWAP.

C) A simple logical participation strategy based on TWAP.

D) A simple logical participation percent-of-volume strategy.

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Answer and Explanation

Implementation shortfall strategies minimize trading costs as defined by the implementation shortfall measure. Because opportunity costs result from non-trading, this strategy trades heavier early in the day to ensure order completion. An implementation shortfall strategy is useful when an entire portfolio must be traded. Simple logical participation strategies patiently trade throughout the day and may not be able to fill the order.