1.Which of the following execution costs can be observed independently?

A)   Commissions and fees.

B)   Opportunity costs.

C)   Market impact costs.

D)   Liquidity costs.

2.The cost of failure to find liquidity is a characteristic of:

A)   opportunity costs.

B)   market impact costs.

C)   commissions and fees.

D)   trader timing costs.

3.Large orders seeking quick execution tends to drive up:

A)   market impact costs.

B)   opportunity costs.

C)   commissions and fees.

D)   capital gains taxes.

1.Which of the following execution costs can be observed independently?

A)   Commissions and fees.

B)   Opportunity costs.

C)   Market impact costs.

D)   Liquidity costs.

The correct answer was A)

Commissions and fees are tangible execution costs and thus can be observed independently. Note that there is a cost trade-off between market impact and opportunity costs, so they cannot be viewed independently. Executing large orders slowly tends to incur higher opportunity costs, especially in an information-sensitive market. On the other hard, rushing large trades incurs higher market impact costs. Market impact costs are the costs of buying liquidity.

2.The cost of failure to find liquidity is a characteristic of:

A)   opportunity costs.

B)   market impact costs.

C)   commissions and fees.

D)   trader timing costs.

The correct answer was A)

The definition of opportunity cost is the cost of failing to find liquidity or failure to execute a trade. Non-execution may result in high costs since failure to fulfill the order can leave the portfolio manager without the security.

3.Large orders seeking quick execution tends to drive up:

A)   market impact costs.

B)   opportunity costs.

C)   commissions and fees.

D)   capital gains taxes.

The correct answer was A)

Market impact costs are higher for large orders demanding market liquidity and quick execution.