Reading 41: Execution of Portfolio Decisions－LOS j motivation, price, trade

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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 j: Discuss the major types of traders, based on their motivation to trade, time versus price preferences, and preferred order types.

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Jack Steele has just determined using analysis that the prospects for Titan Steel are favorable. He would like to trade before other investors realize Titans prospects. What type of trade should he use?

A) limit.

B) market.

C) stop loss.

D) participate.

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Answer and Explanation

Steele is an information-motivated trader. These traders have information that is time sensitive, and if they do not trade quickly, the value of their information will expire. They use market orders to execute quickly and because these orders are less noticeable.

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Information-motivated traders emphasize:

A) price in their trading and use market orders.

B) time in their trading and use market orders.

C) time in their trading and use limit orders.

D) price in their trading and use limit orders.

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Answer and Explanation

Information-motivated traders have information that is time sensitive, and if they do not trade quickly, the value of their information will expire. They, therefore, emphasize time in their trades. They use market orders to execute quickly and because these orders are less noticeable.

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Passive traders emphasize:

A) price in their trading and use limit orders.

B) price in their trading and use market orders.

C) time in their trading and use limit orders.

D) time in their trading and use market orders.

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Answer and Explanation

Passive traders can afford to be very patient and price, not time is their emphasis. They favor limit orders.

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Value-motivated traders emphasize:

A) price in their trading and use market orders.

B) price in their trading and use limit orders.

C) time in their trading and use limit orders.

D) time in their trading and use market orders.

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Answer and Explanation

Value-motivated traders are patient and will use limit orders, because price, not time is their main objective.

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Information-motivated traders emphasize:

A) price in their trading and use market orders.

B) time in their trading and use market orders.

C) time in their trading and use limit orders.

D) price in their trading and use limit orders.

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Answer and Explanation

Information-motivated traders have information that is time sensitive, and if they do not trade quickly, the value of their information will expire. They, therefore, emphasize time in their trades. They use market orders to execute quickly and because these orders are less noticeable.