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Flashcards in S16 Deck (40):
1

effective spread for buy order =

2x ( execution - midquote)

2

effective spread for sell order =

2x ( midquote - execution )

3

as the traders agent, brokers do:

- 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

4

liquid market has:

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

5

execution costs :

explicit and implicit

6

explicit execution costs

commissions
taxes
stamp duties
fees

7

implicit execution costs

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

8

components of implementation shortfall

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

9

implementation shortfall -- realized profit/loss =

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

10

implementation shortfall -- delay or slippage cost =

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

11

implementation shortfall -- missed opportunity

( cancelation - decision ) / decision * cancelled / ordered

12

implementation shortfall (paper) =

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

13

advantages of volume weighted average price

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

14

disadv of volume weighted average price

- 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

15

advantages of implementation shortfall

- 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

16

disadv of implementation shortfall

may not be familiar to traders
requires considerable data and analysis

17

information motivated traders (motivation, needs, order)

possess time senzitive information
need quick execution
place market orderss

18

value motivated traders (motivation, needs, order)

security misvaluation
need good price
place limit order

19

liquidity motivated traders (motivation, needs, order)

reallocation and liquidity
need quick execution
place market orders

20

passive traders (motivation, needs, order)

reallocation and liquidity
need good price
place limit orders

21

trading tactics

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

22

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

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

23

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

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

24

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

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

25

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

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

26

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

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

27

algoritmic trading use

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

28

simple logical participation trading strategies seek to

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

29

4 characteristics of best execution

- 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

30

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

sizes are larger and spread smaller

31

VWAP is close to trade price when

trader dominates the market

32

algoritmic trading should be avoided when

order is large and spread is wide

33

constant proportion portfolio insurance CPPI

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

34

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

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

35

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

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

36

3 situations requiring rebalancing

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

37

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

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

38

recommended re balancing range for volatile assets

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

39

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

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

40

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

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