Reading 41: Execution of Portfolio Decisions－LOS k advantages, motivation, weaknesses, recommend, investor

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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 k: Describe the suitable uses of major trading tactics, evaluate their relative costs, advantages, and weaknesses, and recommend a trading tactic when given a description of the investor's motivation to trade, the size of the trade, and key market characteristics.

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Which of the following trade motivations would most likely use a low-cost-whatever-the-liquidity trading focus?

A) Liquidity and value-motivated.

B) Liquidity and information-motivated.

C) Passive and value-motivated.

D) Passive and information-motivated.

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Answer and Explanation

In a low-cost-whatever-the-liquidity trading focus, the trader places a limit order outside of the current bid-ask quotes in order to minimize trading costs. The strength of this strategy is that commissions, spreads, and market impact costs tend to be low. Passive and value-motivated traders will often purse this patient strategy. Information and liquidity motivated trades need more immediate execution and thus would not use this strategy.

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Which of the following characterizes a need-trustworthy-agent trading focus?

A) High commissions and concealment of information.

B) High commissions and potential leakage of information.

C) Low commissions and potential leakage of information.

D) Low commissions and concealment of information.

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Answer and Explanation

In a need-trustworthy-agent trading focus, the trader employs a broker to skillfully execute a large trade. The broker may need to trade over a period of time, so such orders are not appropriate for information traders. This strategy allows the broker to learn their trade intentions, which may not be in the traders best interests. It also requires high commissions.

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Which of the following trading tactics would most likely be used by an information-motivated trader?

A) Costs-are-not-important.

B) Need-trustworthy-agent.

C) Liquidity-at-any-cost.

D) Advertise-to-draw-liquidity.

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Answer and Explanation

In a liquidity-at-any-cost trading focus, the trader must transact a large block of shares quickly, typically because they possess time-sensitive information. The liquidity-focused trader must be ready to pay a high price for trading in the form of market impact and/or commissions.