A market order is an order to execute the trade immediately at the best possible price. The emphasis in a market order is the speed of execution (the reduction of execution uncertainty). The disadvantage of a market order is that the price it will be executed at is not known ahead of time, it thus has price uncertainty.作者: karoliukas 时间: 2012-3-24 10:51
Which of the following statements best characterizes a limit order? A limit order has:
A)
price uncertainty and execution uncertainty.
B)
reduced price uncertainty but retains execution uncertainty.
C)
price uncertainty but not execution uncertainty.
A limit order is an order to trade at the best possible price, subject to the price satisfying the limit price. A limit order emphasizes the price of execution (the reduction of price uncertainty). It however, may not be filled immediately and may even go unfilled or partially unfilled. A limit order thus has execution uncertainty.作者: karoliukas 时间: 2012-3-24 10:51
A trader submits a buy order that specifies that the trade must be executed at $40 by the end of the day. The execution price is $39.88. What type of order has the trader executed?
A)
A market order.
B)
A principal order.
C)
A limit order.
A limit order is an order to trade at the best possible price, subject to the price satisfying the limit price. For buy orders, the execution price (here $39.88) must be lower or equal to the limit price (here $40). Limit orders also have an expiration date, beyond which they expire.作者: karoliukas 时间: 2012-3-24 10:51
In which of the following markets would the calculation of market impact costs be inappropriate?
A)
Auction markets.
B)
Electronic limit-order markets.
C)
Electronic crossing networks.
In an electronic crossing network, orders are executed at the average of the bid and ask quotes. Prices do not adjust based on supply and demand.作者: karoliukas 时间: 2012-3-24 10:52
Suppose a trader is quoted a market bid price of $40.40 and an ask of $40.49. The execution price of a buy order is $40.47. What is the effective spread?
A)
$0.025.
B)
$0.050.
C)
$0.090.
If a trader placed a buy order, a dealer may offer a better ask price than the previous ask to earn the trader’s business. The midquote of the quoted bid and ask prices is $40.445. The effective spread for this buy order would then be calculated as: 2 × ($40.47 - $40.445) = $0.05, which is 4 cents better than the quoted spread of $0.09 ($40.40 - $40.49).作者: karoliukas 时间: 2012-3-24 10:52
Suppose a trader is quoted a market bid price of $30.00 and an ask of $30.07. The execution price of a buy order is $30.04. What is the effective spread?
A)
$0.01.
B)
$0.06.
C)
$0.02.
If a trader placed a buy order, a dealer may offer a better ask price than the previous ask to earn the trader’s business. The midquote of the quoted bid and ask prices is $30.035. The effective spread for this buy order would then be calculated as: 2 × ($30.04 - $30.035) = $0.01, which is 6 cents better than the quoted spread of $0.07 ($30.07 - $30.00).作者: karoliukas 时间: 2012-3-24 10:53
Suppose a trader is quoted a market bid price of $16.00 and an ask of $16.10. The execution price of a sell order is $16.03. What is the effective spread?
A)
$0.02.
B)
$0.04.
C)
$0.03.
If a trader placed a sell order, a dealer may offer a better bid price than the previous bid to earn the trader’s business. The midquote of the quoted bid and ask prices is $16.05. The effective spread for this sell order would then be calculated as: 2 × ($16.05 - $16.03) = $0.04, which is 6 cents better than the quoted spread of $0.10 ($16.10 - $16.00).作者: karoliukas 时间: 2012-3-24 10:53
Which of the following markets does NOT provide price discovery?
A)
Electronic limit-order markets.
B)
Electronic crossing networks.
C)
Auction markets.
In an electronic crossing network, there is no price discovery because trades are executed at the average of the bid and ask quotes. The trader usually does not know the identity of their counterparty or of their trade size. In an auction market and automated auctions (also known as electronic limit-order markets), orders compete for execution and provide price discovery.作者: karoliukas 时间: 2012-3-24 10:53
In which of the following markets is an order most likely to go unfilled or partially filled?
A)
Auction markets.
B)
Electronic crossing networks.
C)
Electronic limit-order markets.
In an electronic crossing network, trades are executed at the average of the bid and ask quotes. They do not adjust based on supply and demand. As such, prices do not adjust to fill orders. In an auction market and automated auctions (also known as electronic limit-order markets), orders compete for execution and prices can adjust to fill orders.作者: karoliukas 时间: 2012-3-24 10:54
Where would an illiquid security in a developing country most likely trade?
A)
Electronic crossing networks.
B)
Electronic limit-order markets.
C)
Broker markets.
In brokered markets, brokers find the counterparties to a trade. This service is valuable when the trader has a large block to sell, when they want to remain anonymous, and/or when the market for the security is small or illiquid. Brokered markets are important in countries where public capital markets are not well developed.作者: karoliukas 时间: 2012-3-24 10:54
In which of the following relationships does the adverse selection risk problem pertain?
A)
Trader and broker.
B)
Trader and dealer.
C)
Trader and investor.
A trader is more likely to trade with a dealer when he has information that the dealer does not. This results in adverse selection risk for the dealer. The trader’s profit is the dealer’s loss once the information is revealed to the market.作者: karoliukas 时间: 2012-3-24 10:54
In which of the following is there a principal-agent relationship?
A)
Trader and broker.
B)
Broker and dealer.
C)
Trader and dealer.
A principal-agent relationship exists between a trader and the broker. The broker acts as the trader’s agent and locates the necessary liquidity at the best price. The trader can also extract information from the broker regarding the depth of a market and the identity of other traders.作者: karoliukas 时间: 2012-3-24 10:55
Which of the following relationships is adversarial?
A)
Broker and dealer.
B)
Trader and broker.
C)
Trader and dealer.
The relationship between a trader and a dealer is adversarial. The dealer would like to maximize the trade spread and the trader would like to minimize it. Also, when a trader has information that the dealer does not, the trader profits at the dealer’s expense.作者: karoliukas 时间: 2012-3-24 10:55
Which of the following is NOT a characteristic of a liquid market?
A)
Integrity.
B)
Homogenous traders.
C)
An abundance of traders.
The factors contributing to liquidity are an abundance and diversity of traders, convenience, and integrity. Homogenous traders are not diverse.作者: karoliukas 时间: 2012-3-24 10:55
Market A has average bid and ask sizes of 400 shares. Market B has average bid and ask sizes of 600 shares. Market C has average effective spreads of $0.034. Market D has average effective spreads of $0.039. Comparing A to B and C to D, which markets are of the highest quality?
A)
B and D.
B)
A and C.
C)
B and C.
Lower quoted and effective spreads as well as higher bid and ask sizes indicate greater liquidity and greater market quality.作者: karoliukas 时间: 2012-3-24 10:56
Which of the following is NOT a relevant measure of market quality?
A)
Liquidity.
B)
Assurity of completion.
C)
Market prevalence.
A security market should be judged on the basis of its liquidity and assurity of completion.作者: karoliukas 时间: 2012-3-24 10:56
Which of the following trading costs is NOT an explicit cost?
A)
Market impact costs.
B)
Commissions.
C)
Stamp duties.
The explicit costs in a trade are readily discernable and include commissions, taxes, stamp duties, and fees. Implicit costs sometimes cannot be measured as easily but do exist. They include the bid-ask spread, market or price impact costs, opportunity costs, and delay costs (a.k.a. slippage costs).作者: karoliukas 时间: 2012-3-24 10:56
Which of the following trading costs results when an order is not filled?
A)
Delay costs.
B)
Market impact costs.
C)
Price impact costs.
When an order is not filled, delay or slippage costs result. These costs can be substantial if information regarding the security is released while the order sits unfilled.作者: karoliukas 时间: 2012-3-24 10:57
If the volume-weighted average price (VWAP) during a day was $21 and 100 shares were bought at $20.40, which of the following statements regarding the costs of trading is most accurate?
A)
The implicit costs are -$60.
B)
The implicit costs are $60.
C)
The explicit costs are -$60.
Implicit costs are usually measured using some benchmark, such as the VWAP. VWAP is a weighted average of security prices during a day, where the weight applied is the proportion of the day’s trading volume. If the VWAP during a day was $21 and 100 shares were bought at $20.40, then the estimate of the implicit cost would be 100 × ($20.40-$21.00) = -$60. The explicit costs in a trade are the commissions, taxes, stamp duties, and fees.作者: karoliukas 时间: 2012-3-24 10:58
As the senior portfolio manager for the Calvert Pension Fund, Jill Hohlman is responsible for the investment decisions as well as the execution of trades. Debbie Walker is responsible for the equity portion of the Calvert Pension Fund portfolio. It is Hohlman’s belief that her portfolio managers should be able to measure trading costs as well as have a complete understanding of available trading techniques.
Discussing the types of trading cost benchmarks, Hohlman states that the volume-weighted average price (VWAP) is a weighted average of security prices during a day, where the weight applied is the proportion of the day’s trading volume. She states further that the volume-weighted average price is preferred to the trading cost benchmark alternative of the opening day’s stock price because the opening price can be gamed to a greater extent by traders, relative to the volume-weighted average price. She also mentions that the effective spread is another useful alternative to the opening price because the effective spread cannot be gamed.
Discussing the types of trading cost benchmarks further, Walker states that the implementation shortfall, which is the difference between the actual portfolio’s return and a paper portfolio’s return, is probably the most accurate measure of trading costs. She states that the paper portfolio’s return is based on the security price when the decision to trade is originally made. She mentions that it is not subject to gaming, and incorporates both explicit and implicit trading costs.
Hohlman asks Walker to evaluate a trade made last week for the Calvert Pension Fund, using the implementation shortfall measure. The trade was a buy order for the stock of Brucker Industries. Brucker Industries is a small cap stock, which Hohlman thinks is a timely buy given recent announcement about the firm’s prospects. On Wednesday, Brucker Industries stock price closed at $20.00 a share. On Thursday morning before the market opened, the portfolio manager for the Calvert Pension Fund decided to buy Brucker Industries and transferred a limit order for $19.97 a share for 1000 shares to the trader. The order expired unfilled. The Brucker Industries stock closed at $20.03 on Thursday. On Friday, the order was revised to a limit of $20.07. The order was partially filled that day as 800 shares were bought at $20.07. The commission was $14. The stock closed at $20.09 on Friday and the order was cancelled.Regarding Hohlman’s statement concerning trading cost benchmarks:
A)
Hohlman is correct.
B)
Hohlman is incorrect because the effective spread can be gamed.
C)
Hohlman is incorrect because the opening price cannot be gamed more than the volume-weighted average price.
Hohlman is incorrect because the effective spread can be gamed. A trader may wait for other traders to come to them, i.e. when another trader is seeking liquidity. By doing so, the trader can trade at favorable bid and ask prices. However, the trader’s delay may cost the investor foregone profits. She is correct though that the volume-weighted average price is preferred to the opening day’s stock price because the opening price can be gamed to a greater extent by traders, relative to the volume-weighted average price. This is because the opening price is known with more certainty than the VWAP. (Study Session 16, LOS 39.f) Regarding Walker’s statement concerning the implementation shortfall:
A)
Walker is correct.
B)
Walker is incorrect because the implementation shortfall does not incorporate implicit trading costs.
C)
Walker is incorrect because the implementation shortfall is subject to gaming.
Walker is correct. The implementation shortfall is perhaps the most accurate measure of trading costs, it is not subject to gaming, and incorporates both explicit and implicit trading costs. (Study Session 16, LOS 39.g) What is the realized profit and loss component of the implementation shortfall measure Walker should calculate for the Brucker Industries trade?
A)
0.16%.
B)
0.09%.
C)
0.12%.
The realized profit and loss is calculated using the execution price minus the decision price, which is usually measured as the previous day’s closing price. This is divided by the original price and weighted by the proportion of the order filled. It is (800/1000) x ($20.07-$20.03)/$20.00 = 0.16%. The positive value means that there is a loss (a cost) here. (Study Session 16, LOS 39.g) What is the delay costs component of the implementation shortfall measure Walker should calculate for the Brucker Industries trade?
A)
0.18%.
B)
0.24%.
C)
0.12%.
The delay costs are calculated using the difference between the closing price on the day an order was not filled and the previous day closing price. It is weighted by the portion of the order filled. It is (800/1000) x ($20.03-$20.00)/$20.00 = 0.12%. (Study Session 16, LOS 39.g) What is the missed trade opportunity cost component of the implementation shortfall measure Walker should calculate for the Brucker Industries trade?
A)
0.12%.
B)
0.18%.
C)
0.09%.
The missed trade opportunity cost is calculated using the difference between the price at which the order is cancelled and the original price. It is weighted by the portion of the order that is not filled. It equals (200/1000) x ($20.09-$20.00)/$20.00 = 0.09%. (Study Session 16, LOS 39.g) What is the implementation shortfall Walker should calculate for the Brucker Industries trade?
A)
0.44%.
B)
0.51%.
C)
0.37%.
To calculate the implementation shortfall, we must also add in the explicit costs, which are the commission as a percent of the paper portfolio investment: $14/$20,000 = 0.07%. The total implementation cost is the sum of the explicit costs, the realized profit and loss, the delay costs component, and the missed trade opportunity cost component: 0.07%+0.16%+0.12%+0.09% = 0.44%. (Study Session 16, LOS 39.g)作者: karoliukas 时间: 2012-3-24 10:58
If the market return was 1.2% over the time period of trading, the risk-free rate was 0.1%, the stock beta was 1.3, and the shortfall implementation cost is 0.48% for trading in the stock, then what is the shortfall implementation cost to which the manager should be held accountable?
A)
-1.07%.
B)
1.07%.
C)
-1.08%.
The realized profit and loss, delay costs, and missed trade opportunity cost of the implementation shortfall are all affected by market movements that the manager should not be held accountable for. The implementation shortfall should be adjusted for market-wide movements, resulting in the a market-adjusted implementation shortfall. Over a few days, the alpha term is assumed to be zero, so no adjustment for the risk-free rate is necessary. If the market return was 1.2% over the time period of this trading and the beta was 1.3 for the stock, then the expected return for it would be 1.2% ×1.3 = 1.56%. Subtracting this from the 0.48% results in a market-adjusted implementation shortfall of 0.48% - 1.56% = -1.08%.作者: karoliukas 时间: 2012-3-24 10:58
Which of the following statements regarding the implementation shortfall components is least accurate?
A)
Missed trade opportunity cost represents the difference between the price at which the order is cancelled and the original price.
B)
Realized profit and loss represents the difference between the execution price and the previous day's closing price.
C)
Missed trade opportunity cost is weighted by the portion of the order that is filled.
Missed trade opportunity cost is weighted by the portion of the order that is not filled. It is calculated using the difference between the price at which the order is cancelled and the original price. Realized profit and loss uses the difference between the execution price and the previous day's closing price. This is divided by the original price and weighted by the portion of the order filled.作者: karoliukas 时间: 2012-3-24 10:59
Use the following information to calculate the implementation shortfall components:
On Wednesday, the stock price closes at $40 a share.
On Thursday morning before market open, the portfolio manager decides to buy Megawidgets and transfers a limit order for $39.95 a share, for 1,000 shares. The price never falls to $39.95 during the day and the order expires unfilled. The stock closes at $40.04.
On Friday, the order is revised to a limit of $40.05. The order is partially filled that day as 700 shares are bought at $40.05. The commission is $17. The stock closes at $40.08 and the order is cancelled.
A)
The opportunity costs are 0.06% and the total implementation shortfall is 0.19%.
B)
The opportunity costs are 0.06% and the total implementation shortfall is 0.15%.
C)
The opportunity costs are 0.07% and the total implementation shortfall is 0.19%.
To decompose the implementation shortfall, we calculate the following:
Explicit costs – the commission as a percent of the paper portfolio investment is $17/$40,000 = 0.04%.
Realized profit and loss is calculated using the execution price minus the decision price, which is usually measured as the previous day’s closing price. This is divided by the original price and weighted by proportion of the order filled. It is (700/1000) × ($40.05 - $40.04)/$40.00 = 0.02%.
Delay costs are calculated using the difference between the closing prices on the day an order was not filled and the previous day closing price. It is weighted by the portion of the order filled. It is (700/1,000) × ($40.04 - $40.00)/$40.00 = 0.07%.
Missed trade opportunity cost is calculated using the difference between the price at which the order is cancelled and the original price. It is weighted by the portion of the order that is not filled. It equals (300/1,000) × ($40.08 - $40.00)/$40.00 = 0.06%.
The sum of the components is the total implementation cost: 0.04% + 0.02% + 0.07% + 0.06% = 0.19%.作者: karoliukas 时间: 2012-3-24 10:59
Which of the following implementation shortfall components is NOT influenced by market-wide movements?
A)
Explicit costs.
B)
Missed trade opportunity cost.
C)
Realized profit and loss.
The realized profit and loss and missed trade opportunity cost are all affected by market movements that the manager should not be held accountable for. For example, if the security increases due to market-wide movements, the trader should not be held responsible for this non-security specific change in price. Market-wide movements can be adjusted for by the market model.作者: karoliukas 时间: 2012-3-24 10:59
Which of the following measures is least susceptible to gaming by traders?
A)
Implementation Shortfall.
B)
VWAP.
C)
Effective spread.
The measurement least susceptible to gaming would be the implementation shortfall measure. VWAP can be gamed by traders, who might time their trades until the VWAP makes their trading costs appear favorable. The effective spread can also be gamed. A trader can trade at favorable bid and asks by waiting for orders to be brought to them.作者: karoliukas 时间: 2012-3-24 11:00
Which of the following is least accurate regarding VWAP? VWAP:
A)
does not evaluate delayed or unfilled orders.
B)
is applicable to small and large trades.
C)
does not account for market movements or trade volume.
The advantages of VWAP are that it is easily understandable, computationally simple, can be applied quickly to enhance trading decisions, and is most appropriate for small trades in nontrending markets. The disadvantages of VWAP are that it is not informative for trades that dominate trading volume, it can be gamed by traders, it does not evaluate delayed or unfilled orders, and does not account for market movements or trade volume.作者: karoliukas 时间: 2012-3-24 11:00
Which of the following is least accurate regarding implementation shortfall? Implementation shortfall:
A)
requires considerable data and analysis.
B)
decomposes and identifies costs.
C)
is subject to gaming.
The advantages of implementation shortfall are that portfolio managers can see the cost of implementing their ideas, it demonstrates the tradeoff between quick execution and market impact, it decomposes and identifies costs; it can be used in an optimizer to minimize trading costs and maximize performance, and is not subject to gaming. Its disadvantages are that it may be unfamiliar to traders and requires considerable data and analysis.作者: karoliukas 时间: 2012-3-24 11:00
Which of the following statements regarding econometric models is CORRECT? Econometric models:
A)
are used to forecast trading costs and assess trading effectiveness.
B)
are only useful for forecasting trading costs.
C)
are not useful for forecasting trading costs or assessing trading effectiveness.
They can be used to forecast trading costs and assist portfolio managers in determining the size of the trade. They can also be used to assess trading effectiveness by comparing actual trading costs to forecasted trading costs from the models.作者: karoliukas 时间: 2012-3-24 11:01
Which of the following variables is NOT typically used in econometric models to assess trading costs?
A)
Risk.
B)
Market model alpha.
C)
Momentum.
The following are the variables typically used in econometric models:
trading style – more aggressive trading results in higher costs;
momentum – e.g., buying stock costs more when the market is trending upward; and
risk.
作者: karoliukas 时间: 2012-3-24 11:01
Which of the following trades would be predicted to have the highest trading costs using an econometric model?
A)
A small buy order in an upward trending market.
B)
A large buy order in a downward trending market.
C)
A large buy order in an upward trending market.
Econometric models use momentum and trade size relative to available liquidity to predict trading costs. Buying a stock in an upward trending market will incur more costs as will a larger order.作者: Kingpin804 时间: 2012-3-24 12:09
Jack Steele has just determined using analysis that the prospects for Titan Steel are favorable. He would like to trade before other investors realize Titan’s prospects. What type of trade should he use?
A)
limit.
B)
participate.
C)
market.
Steele is an information-motivated trader. These traders have information that is time sensitive, and if they do not trade quickly, the value of their information will expire. They use market orders to execute quickly and because these orders are less noticeable.作者: Kingpin804 时间: 2012-3-24 12:10
Value-motivated traders emphasize:
A)
price in their trading and use limit orders.
B)
time in their trading and use limit orders.
C)
price in their trading and use market orders.
Value-motivated traders are patient and will use limit orders, because price, not time is their main objective.作者: mouse123 时间: 2012-3-24 12:54
Information-motivated traders emphasize:
A)
price in their trading and use limit orders.
B)
price in their trading and use market orders.
C)
time in their trading and use market orders.
Information-motivated traders have information that is time sensitive, and if they do not trade quickly, the value of their information will expire. They, therefore, emphasize time in their trades. They use market orders to execute quickly and because these orders are less noticeable.作者: mouse123 时间: 2012-3-24 12:55
Passive traders emphasize:
A)
time in their trading and use market orders.
B)
price in their trading and use market orders.
C)
price in their trading and use limit orders.
Passive traders can afford to be very patient and price, not time is their emphasis. They favor limit orders.作者: mouse123 时间: 2012-3-24 12:55
Which of the following trading tactics would most likely be used by an information-motivated trader?
A)
Liquidity-at-any-cost.
B)
Need-trustworthy-agent.
C)
Costs-are-not-important.
In a liquidity-at-any-cost trading focus, the trader must transact a large block of shares quickly, typically because they possess time-sensitive information. The liquidity-focused trader must be ready to pay a high price for trading in the form of market impact and/or commissions.作者: mouse123 时间: 2012-3-24 12:55
Which of the following characterizes a need-trustworthy-agent trading focus?
A)
Low commissions and concealment of information.
B)
High commissions and concealment of information.
C)
High commissions and potential leakage of information.
In a need-trustworthy-agent trading focus, the trader employs a broker to skillfully execute a large trade. The broker may need to trade over a period of time, so such orders are not appropriate for information traders. This strategy allows the broker to learn their trade intentions, which may not be in the trader’s best interests. It also requires high commissions.作者: mouse123 时间: 2012-3-24 12:56
Which of the following trade motivations would most likely use a low-cost-whatever-the-liquidity trading focus?
A)
Liquidity and information-motivated.
B)
Liquidity and value-motivated.
C)
Passive and value-motivated.
In a low-cost-whatever-the-liquidity trading focus, the trader places a limit order outside of the current bid-ask quotes in order to minimize trading costs. The strength of this strategy is that commissions, spreads, and market impact costs tend to be low. Passive and value-motivated traders will often purse this patient strategy. Information and liquidity motivated trades need more immediate execution and thus would not use this strategy.作者: mouse123 时间: 2012-3-24 12:57
George White, CFA, and Elizabeth Plain, CFA, manage an account for Briggs and Meyers Securities. In managing the account, White and Plain use a variety of strategies, and they trade in different markets. They use econometric analysis to estimate costs, for example, and algorithmic methods to execute the strategies. White and Plain also use both market orders and limit orders. Their supervisor has asked them to compose a summary of their trading records to see how the various strategies have worked.
The supervisor asks about how to assess the costs and risks of the various types of trades. The supervisor specifically asks White and Plain to explain the difference in the risks associated with market and limit orders. After White and Plain explain how limit orders can give a better price, the supervisor asks why they wouldn’t always use limit orders. White explains the details of execution uncertainty and price uncertainty and how they relate to market and limit orders. As part of the discussion, Plain explains the principle of the effective spread that is associated with market orders. She uses a recent example where the quoted bid and ask price of GHT stock was $25.40 and $25.44 respectively. When White and Plain put in a buy order for 300 shares of GHT stock, at that quoted spread, the order was immediately executed at $25.45. She then calculates the effective spread.
In summarizing transactions costs, White explains how transactions costs include both implicit and explicit costs. He describes a recent situation where he and Plain placed a large buy order for CRD stock. Only half of the trade was executed on the day the order was made, and the second half of the buy order for CRD was executed on the following day. This occurred because the order was for a large number of shares and CRD stock traded in a relatively illiquid market.
The supervisor asks if there are methods for analyzing and predicting costs associated with the size of the order and the liquidity of the market. White and Plain use an econometric model as part of their pre-trade analysis to estimate implicit transactions costs. Their econometric models use the following inputs: market capitalization, volume, and measures of momentum. White says that linear econometric models have proven the most effective because the inputs are fairly normally distributed. Plain says that in addition to simply estimating the costs of a proposed trade, the model can also indicate the optimal size of the trade.
White and Plain also explain their algorithmic methods of trading. They engage in passive trading combined with pegging and discretion strategies that are designed to seize liquidity. They recently decided to trade GHT stock using algorithmic methods. White said that GHT was a good stock to trade this way because their trades of the stock are very small in relation to the volume of the stock in the whole market. Plain adds by saying that GHT has a large spread, and this also makes algorithmic trading ideal for this stock.
Which of the following statements regarding market orders is most accurate? Market orders:
A)
have price uncertainty, and limit orders have execution uncertainty.
B)
have execution uncertainty, and limit orders have price uncertainty.
C)
and limit orders both have execution uncertainty and no price uncertainty.
This is true because a market order can be executed at any price. The limit order may never get executed if the price does not fall into the specified range. (Study Session 16, LOS 39.a) In the example given by Plain, what was the effective spread for the order of 300 shares of GHT stock?
A)
$0.02
B)
$0.04
C)
$0.06
The effective spread is twice the difference between the execution price and the average of the bid/ask spread at the time of the order: $0.06=2 × [$24.45 –($24.44 + $24.40)/2]. (Study Session 16, LOS 39.b) In the example given by White, the term that describes the costs associated with the purchase of CRD stock is:
A)
delay costs.
B)
missed trade opportunity.
C)
volume-weighted costs.
The term delay costs refers to the inability to complete the desired trade immediately because of its size and the liquidity of markets. Delay costs are often measured on the portion of the order carried over from one day to the next. (Study Session 16, LOS 39.g) In the discussion concerning the use of econometric methods in estimating trading costs, White commented on the use of linear methods, and Plain commented on using the models to estimate the optimal trade size. With respect to these statements:
A)
White was correct and Plain was incorrect.
B)
both White and Plain were correct.
C)
White was incorrect and Plain was correct.
White was wrong because non-linear models can be more effective than linear models. Plain is correct because the models can estimate the optimal size of the trade. (Study Session 16, LOS 39.i) With respect to the reasons given for using algorithmic methods for trading GHT stock:
A)
White was correct and Plain was incorrect.
B)
White and Plain were both correct.
C)
Plain was correct and White was incorrect.
Algorithmic trading is ideal for a stock that has a low bid/ask spread. The trades should have a low urgency level and be small with respect to the average volume of that stock. (Study Session 16, LOS 39.l) The best classification of the algorithmic method used by White and Plain is:
A)
opportunistic participation strategies.
B)
implementation shortfall strategy.
C)
simple logical participation strategy.
Opportunistic participation strategies involve passive trading combined with the opportunistic seizing of liquidity. The most common examples are pegging and discretion strategies. In these strategies, the potential buyer posts a bid and hopes others will sell to him and that this will yield negative implicit trading costs. (Study Session 16, LOS 39.l)作者: mouse123 时间: 2012-3-24 12:57
A shortfall implementation strategy trades:
A)
with market flow and attempts to minimize opportunity costs.
B)
early in the day and attempts to minimize opportunity costs.
C)
early in the day and attempts to maximize trading cost volatility.
Implementation shortfall strategies trade heavier early in the day to ensure order completion, reduce opportunity costs, and minimize the volatility of trading costs.作者: mouse123 时间: 2012-3-24 12:58
A trader must trade an entire portfolio of stocks. Which of the following would be the best strategy to pursue?
A)
A simple logical participation percent-of-volume strategy.
B)
A simple logical participation strategy based on VWAP.
C)
An implementation shortfall strategy.
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.作者: mouse123 时间: 2012-3-24 12:58
A simple logical participation strategy trades:
A)
early in the day and attempts to minimize market impact.
B)
with market flow and attempts to minimize market impact.
C)
with market flow and attempts to minimize opportunity costs.
Simple logical participation strategies seek to trade with market flow to minimize market impact.作者: mouse123 时间: 2012-3-24 12:58
A trade’s volume is a small percentage of average daily trading volume. The trade has low spreads and is not urgent. Which of the following would be the best method of filling the trade?
A)
The use of a simple logical participation strategy based on VWAP.
B)
Placing the trade in a crossing system.
C)
The use of an implementation shortfall strategy.
Trades that are a small portion of average daily trading volume, with low spreads, and low urgency should be traded with a simple participation strategy. Simple logical participation strategies patiently trade throughout the day.作者: mouse123 时间: 2012-3-24 12:59
A trade’s volume is a small percentage of average daily trading volume. The trade has low spreads and is urgent. Which of the following would be the best method of filling the trade?
A)
The use of a simple logical participation strategy based on VWAP.
B)
The use of an implementation shortfall strategy.
C)
Placing the trade in a crossing system.
Trades that are a small portion of average daily trading volume, with low spreads, and high urgency should be traded with an implementation shortfall strategy. These strategies trade early in the day and would accommodate an urgent trade.作者: mouse123 时间: 2012-3-24 12:59
A trade’s volume is a large percentage of average daily trading volume and has high spreads. Which of the following would be the best method of filling the trade?
A)
Placing the trade with a broker.
B)
A simple logical participation strategy based on VWAP.
C)
A simple logical participation percent-of-volume strategy.
If a trade is of relatively large size and has a large spread, it should be traded through a skilled broker or through a crossing system to minimize the spread.作者: mouse123 时间: 2012-3-24 12:59
Which of the following is least accurate regarding best execution?
A)
Each party to a trade determines what best execution is.
B)
Best execution can be measured for a single trade.
C)
Best execution cannot be judged separately of the investment decision.
Although best execution can be measured ex post over time, it cannot be measured for a single trade. Best execution cannot be judged independently of the investment decision. Best execution cannot be known with certainty ex ante, it depends on the particular circumstances of the trade. Each party to a trade determines what best execution is.作者: mouse123 时间: 2012-3-24 13:00
Which of the following is least accurate regarding best execution?
A)
Best execution can determine a trader’s effectiveness over time.
B)
Best execution prevents high cost trades from taking place.
C)
Best execution can be measured after the fact for a series of trades.
Some strategies might have high trading costs but that does not mean they should not be pursued if in net they enhance portfolio value. Best execution can be measured after the fact for a series of trades.作者: mouse123 时间: 2012-3-24 13:00
Which of the following is least accurate regarding best execution? Best execution:
A)
depends on relationships and practices.
B)
is similar to the prudence concept.
C)
should be judged independently of the investment decision.
Best execution cannot be judged independently of the investment decision. Prudence and best execution both attempt to improve portfolio performance and meet fiduciary responsibilities. Relationships and practices are integral to best execution.作者: mouse123 时间: 2012-3-24 13:00
Which of the following is least accurate regarding the CFA Institute’s Trade Management Guidelines? They state that investment management firms:
A)
must disclose their conflicts of interest related to trading.
B)
should strive for best execution.
C)
must not disclose documentation concerning policies and procedures to outside parties.
Documentation concerning policies and procedures to outside parties should be disclosed to outside regulators, not held within the firm. The CFA Institute’s Trade Management Guidelines state that in regard to record keeping, investment management firms should maintain the documentation supporting: 1) the firm’s compliance with its policies and procedures; and 2) disclosures made to its clients. In doing so, the firm provides evidence to regulators as to how the firm pursues best execution for its clients.作者: mouse123 时间: 2012-3-24 13:01
Which of the following is least accurate regarding the CFA Institute’s Trade Management Guidelines? They state that investment management firms should:
A)
provide general information on their trading techniques, markets, and brokers.
B)
hire independent outside consultants to ensure best execution.
C)
have policies and procedures that assist in best execution.
The CFA Institute’s Trade Management Guidelines do not require that investment management firms hire independent outside consultants to ensure best execution.作者: mouse123 时间: 2012-3-24 13:01
Which of the following is NOT one of the three components of the CFA Institute’s Trade Management Guidelines?
A)
Measurement tools.
B)
Disclosures.
C)
Processes.
The CFA Institute’s Trade Management Guidelines are split into three parts: processes, disclosures, and record keeping. These guidelines are meant to assist investment management firms in achieving best execution and maximum portfolio value for their clients.作者: mouse123 时间: 2012-3-24 13:01
Which of the following is least accurate regarding the role of ethics in trading?
A)
Trust has become more important.
B)
Buy-side traders have a fiduciary duty to maximize the value of the client’s portfolio.
C)
The relationship between buy-side and sell-side traders is becoming less adversarial.
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 has become more important given the potential negative ramifications of trading with an unscrupulous trader.作者: mouse123 时间: 2012-3-24 13:02
Which of the following statements regarding a buy-side trader’s priority is CORRECT?
A)
Their relationships with their broker, the client, and sell-side traders are of equal priority.
B)
Their relationship with the client must come first.
C)
Their relationship with sell-side trader must come first.
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 client’s portfolio. The buy-side trader’s relationships with sell-side traders must never come before the interests of their clients.作者: mouse123 时间: 2012-3-24 13:02
Frank Rolle is a portfolio manager who works for a firm that offers comprehensive portfolio management and employs buy-side traders. Rolle and his buy-side trader are considering shifting their business to a sell-side trader, Jack Smith. Smith has promised that Rolle and his traders will gain access to investment research put out by his firm. Rolle knows that Smith’s firm tends to charge higher commissions. Rolle does not believe the quality of Smith’s research to be any better than he is currently receiving from other sell-side traders. What should Rolle do?
A)
Not trade with Smith because his research is of no better quality.
B)
Not trade with Smith because the interests of his clients come first.
C)
Trade with Smith because he may have better research.
Buy-side traders and portfolio managers have a fiduciary duty to maximize the value of their client’s portfolio. Smith’s higher commissions should prevent Rolle from trading with him. The buy-side trader’s relationships with sell-side traders must never come before the interests of their clients. There is no evidence that Smith has done anything improper, so reporting him to the exchange regulators is unnecessary.作者: mouse123 时间: 2012-3-24 13:02
Which of the following is least accurate regarding best execution, the CFA Institute’s Trade Management Guidelines, and ethics in trading?
A)
Best execution should be measured over short, relevant time periods.
B)
The buy-side trader’s relationship with clients must come before their relationship with sell-side traders.
C)
Record keeping is a key component of the CFA Institute’s Trade Management Guidelines.
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 client’s portfolio.
