Reading 41: Execution of Portfolio Decisions－LOS e quality, criteria, market

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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 e: Explain the criteria of market quality and evaluate the quality of a market when given a description of its characteristics.

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Which of the following is NOT a characteristic of a liquid market?

A) An abundance of traders.

B) Homogenous traders.

C) Convenience.

D) Integrity.

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Answer and Explanation

The factors contributing to liquidity are an abundance and diversity of traders, convenience, and integrity. Homogenous traders are not diverse.

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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 C.

B) B and D.

C) A and C.

D) A and D.

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Answer and Explanation

Lower quoted and effective spreads as well as higher bid and ask sizes indicate greater liquidity and greater market quality.

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Which of the following is NOT a relevant measure of market quality?

A) Liquidity.

B) Transparency.

C) Assurity of completion.

D) Market prevalence.

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Answer and Explanation

A security market should be judged on the basis of its liquidity, transparency, and assurity of completion.