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LOS n: Explain the meaning and criteria of best execution. fficeffice" />

Q1. Which of the following is FALSE regarding best execution? Best execution:

A)   depends on relationships and practices.

B)   should be judged independently of the investment decision.

C)   is similar to the prudence concept.

Correct answer is B)

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.

 

Q2. Which of the following is FALSE 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.

Correct answer is B)

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.

 

Q3. Which of the following is FALSE regarding best execution?

A)   Best execution can be measured for a single trade.

B)   Each party to a trade determines what best execution is.

C)   Best execution cannot be judged separately of the investment decision.

Correct answer is A)

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.