Reading 41: Execution of Portfolio Decisions－LOS f trade, terms, including, execution

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 f: Review the components of execution costs, including explicit and implicit costs, and evaluate a trade in terms of these costs.

tycoon

Which of the following trading costs is NOT an explicit cost?

A) Commissions.

B) Taxes.

C) Market impact costs.

D) Stamp duties.

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Answer and Explanation

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).

tycoon

Which of the following trading costs results when an order is not filled?

A) Price impact costs.

B) Market impact costs.

C) Stamp duties.

D) Delay costs.

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Answer and Explanation

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.

tycoon

If the VWAP during a day was $21 and 100 shares were bought at $20.40, which of the following is TRUE regarding the costs of trading?

A) The implicit costs are -$60.

B) The explicit costs are -$60.

C) The explicit costs are $60.

D) The implicit costs are $60.

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Answer and Explanation

Implicit costs are usually measured using some benchmark, such as the volume-weighted average price (VWAP). VWAP is a weighted average of security prices during a day, where the weight applied is the proportion of the days 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.