S16

Question 1

effective spread for buy order =

Answer 1

2x ( execution - midquote)

Question 2

effective spread for sell order =

Answer 2

2x ( midquote - execution )

Question 3

as the traders agent, brokers do:

Answer 3

• represent the order
• find couterparties to the trade
• provide secrecy
• provide other services (record keeping, safe keeping, cash management) - but not liquidity which is the role of the DEALER
• support the market

Question 4

liquid market has:

Answer 4

• abundance of buyers and sellers
• investor characteristics are diverse
• convenient location or trading plafrom
• integrity

Question 5

execution costs :

Answer 5

explicit and implicit

Question 6

explicit execution costs

Answer 6

commissions
taxes
stamp duties
fees

Question 7

implicit execution costs

Answer 7

bid ask spread
market or price impact costs
opportunity costs
delay costs (slippage)

Question 8

components of implementation shortfall

Answer 8

explicit costs
realized profit loss
delay or slippage cost
missed trade opportunity cost

Question 9

implementation shortfall – realized profit/loss =

Answer 9

(exe - previous close) / decision * purchased / ordered

Question 10

implementation shortfall – delay or slippage cost =

Answer 10

( previous close - decision ) / decision * purchased / ordered

Question 11

implementation shortfall – missed opportunity

Answer 11

( cancelation - decision ) / decision * cancelled / ordered

Question 12

implementation shortfall (paper) =

Answer 12

( paper portfolio gain - real portfolio gain ) / paper portfolio investment

Question 13

advantages of volume weighted average price

Answer 13

• easily understood
• computationally simple
• can be applied quickly to enhance trading decisions
• most appropriate for comparing small trades in nontrending markets

Question 14

disadv of volume weighted average price

Answer 14

• not informative for trades that dominate the trading volume
• can be gamed by traders
• does not evaluate delayed of unfilled orders
• does not account for market movements or trade volume

Question 15

advantages of implementation shortfall

Answer 15

• PMs can see the cost of implemeting their ideas
• demos the tradeoff between quick execution and market impact
• decompose and identifies costs
• can be used in an optimizer to minimize trading costs
• not subject to gaming

Question 16

disadv of implementation shortfall

Answer 16

may not be familiar to traders

requires considerable data and analysis

Question 17

information motivated traders (motivation, needs, order)

Answer 17

possess time senzitive information
need quick execution
place market orderss

Question 18

value motivated traders (motivation, needs, order)

Answer 18

security misvaluation
need good price
place limit order

Question 19

liquidity motivated traders (motivation, needs, order)

Answer 19

reallocation and liquidity
need quick execution
place market orders

Question 20

passive traders (motivation, needs, order)

Answer 20

reallocation and liquidity
need good price
place limit orders

Question 21

trading tactics

Answer 21

liquidity at any cost
costs are not important
need trustworthy agent
advertise to draw liquidity
low cost whatever the liquidity

Question 22

liquidity at any cost - trading tactics (+, -, motivation)

Answer 22

+quick certain execution
- high costs and leakage of info
motivation : information

Question 23

costs are not important - trading tactics (+, -, motivation)

Answer 23

+quick certain execution
- loss of control of trade costs
motivations : diverse

Question 24

need trustworthy agent - trading tactics (+, -, motivation)

Answer 24

+brokers use skill and time to obtain good price
- high commission and potential leakage
motivation : not information

Question 25

advertise to draw liquidity - trading tactics (+, -, motivation)

Answer 25

+market determined price - higher admin costs and possible front run motivation : not information

Question 26

low cost whatever the liquidity - trading tactics (+, -, motivation)

Answer 26

+ low trading costs - uncertain timing and possibly trading into weakness motivation : passive and value

Question 27

algoritmic trading use

Answer 27

automated quantitative systems that utilize trading rules, benchmarks, and constraints

Question 28

simple logical participation trading strategies seek to

Answer 28

trade with market flow so as to not becovme overly noticeable to the market and to minimize the market impact

Question 29

4 characteristics of best execution

Answer 29

- cannot be judged independently of the investment decision - cannot be known with certainty ex ante - can be assessed only ex post - relashionships and practices are intergral part of execution

Question 30

bid ask sizes vs spread. market is of better quality if

Answer 30

sizes are larger and spread smaller

Question 31

VWAP is close to trade price when

Answer 31

trader dominates the market

Question 32

algoritmic trading should be avoided when

Answer 32

order is large and spread is wide

Question 33

constant proportion portfolio insurance CPPI

Answer 33

target equities = M x (Portfolio value - floor value)

Question 34

contstant mix is a conXXXXX strategy (Vaxis value of assets vs Haxis value of stock market

Answer 34

concave strategy - marginal profit smaller when stock market is moving up

Question 35

CPPI is a conXXXXX strategy (Vaxis value of assets vs Haxis value of stock market

Answer 35

convex strategy - marginal profit larger when stock market is moving up

Question 36

3 situations requiring rebalancing

Answer 36

changes in: - investor circumstances - economic./market conditions - portfolio itself

Question 37

risk related assumptions of the buyhold, constant mix and CPPI strategies

Answer 37

Buyhold passively assumes risk tolerance increasing with wealth Constant mix - risk tolerance is constant regardles of wealth CPPI - activelly assumes risk tolerance directly related to wealth

Question 38

recommended re balancing range for volatile assets

Answer 38

narrow to allow quick detection and correction before they go further out of desired range (n.b. do not worry about higher costs)

Question 39

Correlation to the rest of portfolio - impact on allocation bands?

Answer 39

Higher correlation lowers probability of large divergences, so wide range ismacceptable.

Question 40

Volatility of rest of the portfolio , impact on allocation range?

Answer 40

If rest of pf is volatile, narror range of allocation needed.