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周教授CFA金融课程:2021年CFA一二三级系列课程
If the market return was 1.2% over the time period of trading, the risk-free rate was 0.1%, the stock beta was 1.3, and the shortfall implementation cost is 0.48% for trading in the stock, then what is the shortfall implementation cost to which the manager should be held accountable?
A)
-1.07%.
B)
1.07%.
C)
-1.08%.



The realized profit and loss, delay costs, and missed trade opportunity cost of the implementation shortfall are all affected by market movements that the manager should not be held accountable for. The implementation shortfall should be adjusted for market-wide movements, resulting in the a market-adjusted implementation shortfall. Over a few days, the alpha term is assumed to be zero, so no adjustment for the risk-free rate is necessary. If the market return was 1.2% over the time period of this trading and the beta was 1.3 for the stock, then the expected return for it would be 1.2% ×1.3 = 1.56%. Subtracting this from the 0.48% results in a market-adjusted implementation shortfall of 0.48% - 1.56% = -1.08%.

TOP

Which of the following statements regarding the implementation shortfall components is least accurate?
A)
Missed trade opportunity cost represents the difference between the price at which the order is cancelled and the original price.
B)
Realized profit and loss represents the difference between the execution price and the previous day's closing price.
C)
Missed trade opportunity cost is weighted by the portion of the order that is filled.



Missed trade opportunity cost is weighted by the portion of the order that is not filled. It is calculated using the difference between the price at which the order is cancelled and the original price. Realized profit and loss uses the difference between the execution price and the previous day's closing price. This is divided by the original price and weighted by the portion of the order filled.

TOP

Use the following information to calculate the implementation shortfall components:
  • On Wednesday, the stock price closes at $40 a share.
  • On Thursday morning before market open, the portfolio manager decides to buy Megawidgets and transfers a limit order for $39.95 a share, for 1,000 shares. The price never falls to $39.95 during the day and the order expires unfilled. The stock closes at $40.04.
  • On Friday, the order is revised to a limit of $40.05. The order is partially filled that day as 700 shares are bought at $40.05. The commission is $17. The stock closes at $40.08 and the order is cancelled.
A)
The opportunity costs are 0.06% and the total implementation shortfall is 0.19%.
B)
The opportunity costs are 0.06% and the total implementation shortfall is 0.15%.
C)
The opportunity costs are 0.07% and the total implementation shortfall is 0.19%.



To decompose the implementation shortfall, we calculate the following:
  • Explicit costs – the commission as a percent of the paper portfolio investment is $17/$40,000 = 0.04%.
  • Realized profit and loss is calculated using the execution price minus the decision price, which is usually measured as the previous day’s closing price. This is divided by the original price and weighted by proportion of the order filled. It is (700/1000) × ($40.05 - $40.04)/$40.00 = 0.02%.
  • Delay costs are calculated using the difference between the closing prices on the day an order was not filled and the previous day closing price. It is weighted by the portion of the order filled. It is (700/1,000) × ($40.04 - $40.00)/$40.00 = 0.07%.
  • Missed trade opportunity cost is calculated using the difference between the price at which the order is cancelled and the original price. It is weighted by the portion of the order that is not filled. It equals (300/1,000) × ($40.08 - $40.00)/$40.00 = 0.06%.

The sum of the components is the total implementation cost: 0.04% + 0.02% + 0.07% + 0.06% = 0.19%.

TOP

Which of the following implementation shortfall components is NOT influenced by market-wide movements?
A)
Explicit costs.
B)
Missed trade opportunity cost.
C)
Realized profit and loss.



The realized profit and loss and missed trade opportunity cost are all affected by market movements that the manager should not be held accountable for. For example, if the security increases due to market-wide movements, the trader should not be held responsible for this non-security specific change in price. Market-wide movements can be adjusted for by the market model.

TOP

Which of the following measures is least susceptible to gaming by traders?
A)
Implementation Shortfall.
B)
VWAP.
C)
Effective spread.



The measurement least susceptible to gaming would be the implementation shortfall measure. VWAP can be gamed by traders, who might time their trades until the VWAP makes their trading costs appear favorable. The effective spread can also be gamed. A trader can trade at favorable bid and asks by waiting for orders to be brought to them.

TOP

Which of the following is least accurate regarding VWAP? VWAP:
A)
does not evaluate delayed or unfilled orders.
B)
is applicable to small and large trades.
C)
does not account for market movements or trade volume.



The advantages of VWAP are that it is easily understandable, computationally simple, can be applied quickly to enhance trading decisions, and is most appropriate for small trades in nontrending markets. The disadvantages of VWAP are that it is not informative for trades that dominate trading volume, it can be gamed by traders, it does not evaluate delayed or unfilled orders, and does not account for market movements or trade volume.

TOP

Which of the following is least accurate regarding implementation shortfall? Implementation shortfall:
A)
requires considerable data and analysis.
B)
decomposes and identifies costs.
C)
is subject to gaming.



The advantages of implementation shortfall are that portfolio managers can see the cost of implementing their ideas, it demonstrates the tradeoff between quick execution and market impact, it decomposes and identifies costs; it can be used in an optimizer to minimize trading costs and maximize performance, and is not subject to gaming. Its disadvantages are that it may be unfamiliar to traders and requires considerable data and analysis.

TOP

Which of the following statements regarding econometric models is CORRECT? Econometric models:
A)
are used to forecast trading costs and assess trading effectiveness.
B)
are only useful for forecasting trading costs.
C)
are not useful for forecasting trading costs or assessing trading effectiveness.



They can be used to forecast trading costs and assist portfolio managers in determining the size of the trade. They can also be used to assess trading effectiveness by comparing actual trading costs to forecasted trading costs from the models.

TOP

Which of the following variables is NOT typically used in econometric models to assess trading costs?
A)
Risk.
B)
Market model alpha.
C)
Momentum.



The following are the variables typically used in econometric models:
  • security liquidity – trading volume, market cap, spread, price;
  • size of the trade relative to liquidity;
  • trading style – more aggressive trading results in higher costs;
  • momentum – e.g., buying stock costs more when the market is trending upward; and
  • risk.

TOP

Which of the following trades would be predicted to have the highest trading costs using an econometric model?
A)
A small buy order in an upward trending market.
B)
A large buy order in a downward trending market.
C)
A large buy order in an upward trending market.



Econometric models use momentum and trade size relative to available liquidity to predict trading costs. Buying a stock in an upward trending market will incur more costs as will a larger order.

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