Reading 41: Execution of Portfolio Decisions－LOS p ethics

tycoon

CFA Institute Area 3-5, 7, 12, 14-18: Portfolio Management
Session 14: Execution of Portfolio Decisions
Reading 41: Execution of Portfolio Decisions
LOS p: Discuss the role of ethics in trading.

tycoon

Which of the following is FALSE regarding the role of ethics in trading?

A) Trust has become more important.

B) The buy-side traders relationships with other parties must not come before clients interests.

C) The relationship between buy-side and sell-side traders is becoming less adversarial.

D) Buy-side traders have a fiduciary duty to maximize the value of the clients portfolio.

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Answer and Explanation

Brokerage commissions have fallen dramatically. The temptation is to shift costs to those that are implicit, rather than explicit. Thus, trading between buy-side and sell-side traders is becoming more adversarial. Furthermore, the disclosure of information in a trade can be used against a trader later on, especially with the advent of electronic trading venues where trader identity can be kept confidential. Thus, trust becomes has become more important given the potential negative ramifications of trading with an unscrupulous trader.

tycoon

Which of the following is TRUE regarding a buy-side traders priority?

A) Their relationship with the client must come first.

B) Their relationship with sell-side trader must come first.

C) Their relationships with the client and sell-side traders are of equal priority.

D) Their relationships with their broker, the client, and sell-side traders are of equal priority.

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Answer and Explanation

The buy-side trader should always be acting in the best interests of their clients. Buy-side traders and portfolio managers have a fiduciary duty to maximize the value of their clients portfolio. The buy-side traders relationships with sell-side traders must never come before the interests of their clients.

tycoon

Which of the following is FALSE regarding best execution, the CFA Institutes Trade Management Guidelines, and ethics in trading?

A) Best execution should be measured over short, relevant time periods.

B) The buy-side traders relationship with clients must come before their relationship with sell-side traders.

C) Record keeping is a key component of the CFA Institutes Trade Management Guidelines.

D) Buy-side traders have a fiduciary duty to their clients.

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Answer and Explanation

Although best execution can be measured ex post over time, it should not be used to evaluate trading effectiveness over a short time span. Buy-side traders and portfolio managers have a fiduciary duty to maximize the value of their clients portfolio.