Portfolio Management and Wealth Planning【Session16 - Reading 39】 trade, market, best, 2012

karoliukas

A market order has:

A) both price uncertainty and execution uncertainty.

B) execution uncertainty but not price uncertainty.

C) price uncertainty but not execution uncertainty.

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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.

mouse123

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.

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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.

mouse123

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.

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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.

mouse123

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.

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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.

mouse123

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.

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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.

mouse123

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.

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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.

mouse123

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.

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The CFA Institute’s Trade Management Guidelines do not require that investment management firms hire independent outside consultants to ensure best execution.

mouse123

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.

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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.

mouse123

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.

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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.

mouse123

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.

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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.