Reading 41: Execution of Portfolio Decisions－LOS i methods

tycoon

CFA Institute Area 3-5, 7, 12, 14-18: Portfolio Management
Session 14: Execution of Portfolio Decisions
Reading 41: Execution of Portfolio Decisions
LOS i: Explain the use of econometric methods in pre-trade analysis to estimate implicit transaction costs.

tycoon

Which of the following variables is NOT typically used in econometric models to assess trading costs?

A) Market model alpha.

B) Size of the trade relative to liquidity.

C) Risk.

D) Momentum.

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Answer and Explanation

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.

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.

tycoon

Which of the following is TRUE regarding econometric models? Econometric models:

A) are only useful for assessing trading effectiveness.

B) are only useful for forecasting trading costs.

C) are not useful for forecasting trading costs or assessing trading effectiveness.

D) are used to forecast trading costs and assess trading effectiveness.

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Answer and Explanation

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.

[此贴子已经被作者于2008-9-17 16:16:50编辑过]

tycoon

Which of the following trades would be predicted to have the highest trading costs using an econometric model?

A) A large buy order in a downward trending market.

B) A small buy order in an upward trending market.

C) A large buy order in an upward trending market.

D) A small buy order in a downward trending market.

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Answer and Explanation

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.