CFA 2018 level 3 schweser practice exam CFA 2018 level 3 question bank 31 a

CFA LEVEL-III, PRACTICE QUESTIONS (LOS # 30)
Reading 30: (Execution of Portfolio Decisions)

| Solution

Question 1 - #92088
Your answer: B was incorrect. The correct answer was A) Explicit costs.
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.
This question tested from Session 16, Reading 30, LOS g.
Question 2 - #92255
Your answer: B was incorrect. The correct answer was C) Measurement tools.
The CFA Institute’s Trade Management Guidelines are split into three parts: processes, disclosures,
and record keeping. These guidelines are meant to assist investment management firms in achieving
best execution and maximum portfolio value for their clients.
This question tested from Session 16, Reading 30, LOS o.
Question 3 - #92611
Your answer: B was incorrect. The correct answer was C) An implementation shortfall strategy.
Implementation shortfall strategies minimize trading costs as defined by the implementation shortfall
measure. Because opportunity costs result from non-trading, this strategy trades heavier early in the
day to ensure order completion. An implementation shortfall strategy is useful when an entire
portfolio must be traded. Simple logical participation strategies patiently trade throughout the day
and may not be able to fill the order.
This question tested from Session 16, Reading 30, LOS l.
Question 4 - #92827
Your answer: B was incorrect. The correct answer was C) Their relationship with the client must
come first.
The buy-side trader should always be acting in the best interests of their clients. Buy-side traders and
portfolio managers have a fiduciary duty to maximize the value of their client’s portfolio. The buyside trader’s relationships with sell-side traders must never come before the interests of their clients.

This question tested from Session 16, Reading 30, LOS p.
Question 5 - #126891
Part 1)
Your answer: B was incorrect. The correct answer was A) 0.02%.
The realized profit and loss is calculated using the execution price minus the previous day's closing
price. This is divided by the original benchmark price and weighted by the proportion of the order
filled. It is (700 / 1,000) × ($60.07 − $60.05) / $60.00 = 0.02%. The positive value means that there
is a loss (a cost) here. (Study Session 16, LOS 39.g)
This question tested from Session 16, Reading 30, LOS g.
Part 2)
Your answer: B was correct!
The missed trade opportunity cost is calculated using the difference between the price at which the
order is cancelled and the original benchmark price. It is weighted by the portion of the order that is
not filled. It equals (300 / 1,000) × ($60.08 − $60.00) / $60.00 = 0.04%. (Study Session 16, LOS
39.g)
This question tested from Session 16, Reading 30, LOS g.
Part 3)
Your answer: B was incorrect. The correct answer was C) -0.50%.
To calculate the implementation shortfall, we must also add in the delay costs and the explicit costs.
The delay costs are calculated using the difference between the closing price on the day an order was
not filled and the benchmark price. It is weighted by the portion of the order filled. It is (700 / 1,000)
× ($60.05 − $60.00) / $60.00 = 0.06%.
The explicit costs are the commission as a percent of the paper portfolio investment: $19 / $60,000 =
0.03%.


The total implementation cost is the sum of the explicit costs, the realized profit and loss, the delay
costs component, and the missed trade opportunity cost component: 0.03% + 0.02% + 0.06% +
0.04% = 0.15%.
If the market return was 0.5% over the time period of this trading and the beta was 1.3 for Allen

Materials, then the expected return for it would be 0.5% × 1.3 = 0.65%. Subtracting this from the
0.15% results in a market-adjusted implementation shortfall of 0.15% − 0.65% = -0.50%. With this
adjustment, the manager's trading costs are actually negative. In other words, in the trading process,
the manager "lost out" on a return of 0.15%, which is less than the expected return of 0.65%. So
relatively speaking, the manager did not incur costs from trading. (Study Session 16, LOS 39.g) This
question tested from Session 16, Reading 30, LOS g.
Part 4)
Your answer: B was incorrect. The correct answer was C) Only one is correct.
Wienke is correct. The volume-weighted average price (VWAP) is a weighted average of security
prices during a day, where the weight applied is the proportion of the day's trading volume. It is
useful because it can be applied quickly and easily.
Brooks is incorrect. Although it is true that a trader may try to game the volume-weighted average
price by delaying the trade, the trader would wait until the ask price is less than the volume-weighted
average price. Although it would appear that the trader has minimized trading costs in this case, the
level of overall prices could have increased so that the trade should have been executed earlier.
(Study Session 16, LOS 39.f)
This question tested from Session 16, Reading 30, LOS g.
Part 5)
Your answer: B was incorrect. The correct answer was C) ABCD.
The trade for stock ABCD is large relative to average daily trading volume (75,000 / 125,000 = 60%)
and has a large spread. Because of these characteristics, it should be traded through a skilled broker
or through a crossing system to minimize the spread. (Study Session 16, LOS 39.m)
This question tested from Session 16, Reading 30, LOS g.
Part 6)
Your answer: B was incorrect. The correct answer was C) LMNO.
The LMNO trade is of small relative size (120,000 / 2,000,000 = 6%), has a small spread, and has
high urgency. It should be traded quickly using an implementation shortfall strategy.
Furthermore, an implementation shortfall strategy trades a large volume early in the day, thus stock
LMNO is suitable and stock FGHI is not suitable for an implementation shortfall strategy.
The trade for stock WXYZ is relatively small (30,000 / 900,000 = 3.3%) and the spread is low. The

WXYZ trade is of low urgency and can be traded over time. It is thus suitable for a simple
participation strategy based on VWAP or other benchmark. (Study Session 16, LOS 39.m)
This question tested from Session 16, Reading 30, LOS g.
Question 6 - #93157
Your answer: B was correct!
Lower quoted and effective spreads as well as higher bid and ask sizes indicate greater liquidity and
greater market quality.
This question tested from Session 16, Reading 30, LOS e.
Question 7 - #91869
Your answer: B was incorrect. The correct answer was 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.
This question tested from Session 16, Reading 30, LOS i.
Question 8 - #91597
Your answer: B was incorrect. The correct answer was C) Passive and value-motivated.
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.
This question tested from Session 16, Reading 30, LOS k.


Question 9 - #91972
Your answer: B was incorrect. The correct answer was C) is applicable to small and large trades.
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.
This question tested from Session 16, Reading 30, LOS h.
Question 10 - #92012
Your answer: B was incorrect. The correct answer was A) $0.050.
If a trader placed a buy order, a dealer may offer a better ask price than the previous ask to earn the
trader’s business. The midquote of the quoted bid and ask prices is $40.445. The effective spread for
this buy order would then be calculated as: 2 × ($40.47 - $40.445) = $0.05, which is 4 cents better
than the quoted spread of $0.09 ($40.40 - $40.49).
This question tested from Session 16, Reading 30, LOS b.
Question 11 - #92434
Your answer: B was correct!
Trades that are a small portion of average daily trading volume, with low spreads, and low urgency
should be traded with a simple participation strategy. Simple logical participation strategies patiently
trade throughout the day.
This question tested from Session 16, Reading 30, LOS m.
Question 12 - #91600
Your answer: B was incorrect. The correct answer was C) High commissions and potential leakage
of information.
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 trader’s best interests. It also requires high commissions.
This question tested from Session 16, Reading 30, LOS k.
Question 13 - #92004
Part 1)
Your answer: B was incorrect. The correct answer was C) Benson is correct.
Benson is correct. In an electronic crossing network, the costs of trading are low because
commissions are low and traders do not pay a dealer’s bid-ask spread. A trade may not be filled or
may be only partially filled if there are insufficient traders on the opposite side of the trade. Prices do
not adjust to supply and demand conditions. This results in trades being unfilled or partially filled

because prices do not respond to fill the traders’ orders. (Study Session 16, LOS 39.c)
This question tested from Session 16, Reading 30, LOS b.
Part 2)
Your answer: B was incorrect. The correct answer was A) Wortek is incorrect because brokered
markets allow traders to remain anonymous.
Wortek is incorrect. In brokered markets, brokers find the counterparties to a trade. This service is
valuable when the trader has a large block to sell, when they want to remain anonymous, and/or
when the market for the security is small or illiquid. Brokered markets are particularly important in
countries where public capital markets are not well developed. (Study Session 16, LOS 39.c)
This question tested from Session 16, Reading 30, LOS b.
Part 3)
Your answer: B was incorrect. The correct answer was A) $0.0633.
The quoted spread for each order is the difference between the ask and bid prices:
Time of Trade Ask minus Bid Price Quoted Spread
10 a.m.

$10.07 - $10.00

$0.07

12 p.m.

$9.96 - $9.90

$0.06

1 p.m.

$9.94 - $9.88

$0.06


The average quoted spread is a simple average of the quoted spreads: ($0.07 + $0.06 + $0.06) / 3 =
$0.0633. (Study Session 16, LOS 39.b)
This question tested from Session 16, Reading 30, LOS b.
Part 4)
Your answer: B was correct!
The effective spread for a sell order is twice the midquote of the market bid and ask prices minus the
execution price.
The midquote for each trade is calculated as:
Time of Trade Midquote
10 a.m.
($10.07 + $10.00) / 2 = $10.035
12 p.m.
($9.96 + $9.90) / 2= $9.93
1 p.m.
($9.94 + $9.88) / 2 = $9.91
The effective spread for each sell order is:
Time of Trade 2 x (Midquote – Execution Price) = Effective Spread
10 a.m.
2 x ($10.035 - $9.98) = $0.11
12 p.m.
2 x ($9.93 - $9.92) = $0.02
1 p.m.
2 x ($9.91 - $9.91) = $0.00
The average effective spread is ($0.11 + $0.02 + $0.00) / 3 = $0.0433. (Study Session 16, LOS 39.b)
This question tested from Session 16, Reading 30, LOS b.
Part 5)
Your answer: B was incorrect. The correct answer was C) $0.0641.

The weighted average effective spread weights the effective spread for each trade by the trade size,
relative to the total shares traded, which in this example is 1700: (900/1700)$0.11 + (500/1700)$0.02
+ (300/1700)$0.00 = $0.0641. (Study Session 16, LOS 39.b)
This question tested from Session 16, Reading 30, LOS b.
Part 6)
Your answer: B was incorrect. The correct answer was C) Two of the trades resulted in price
improvement but the third did not.
In the second and third trades, there was price improvement because the sell orders were executed at
bid prices higher than the quoted bid prices. Hence the effective spread was lower than the quoted
spread. In the first trade, the trade size was larger than the bid size. The effective spread in this case
was higher than that quoted due to the market impact of the large order.
Overall, the simple average effective spreads was lower than the average quoted spread, reflecting
the price improvement in the last two trades. The weighted average effective spread was higher than
the average quoted spread, reflecting the market impact of the first trade, which was relatively larger
in volume than either of the last two trades. (Study Session 16, LOS 39.b)
This question tested from Session 16, Reading 30, LOS b.
Question 14 - #92338
Your answer: B was incorrect. The correct answer was A) Best execution can be measured for a
single trade.
Although best execution can be measured ex post over time, it cannot be measured for a single trade.
Best execution cannot be judged independently of the investment decision. Best execution cannot be
known with certainty ex ante, it depends on the particular circumstances of the trade. Each party to a
trade determines what best execution is.
This question tested from Session 16, Reading 30, LOS n.
Question 15 - #92334
Your answer: B was incorrect. The correct answer was C) Best execution prevents high cost trades
from taking place.
Some strategies might have high trading costs but that does not mean they should not be pursued if in
net they enhance portfolio value. Best execution can be measured after the fact for a series of trades.
This question tested from Session 16, Reading 30, LOS n.

Question 16 - #92588


Part 1)
Your answer: B was incorrect. The correct answer was A) Hohlman is incorrect because the effective
spread can be gamed.
Hohlman is incorrect because the effective spread can be gamed. A trader may wait for other traders
to come to them, i.e. when another trader is seeking liquidity. By doing so, the trader can trade at
favorable bid and ask prices. However, the trader’s delay may cost the investor foregone profits. She
is correct though that the volume-weighted average price is preferred to the opening day’s stock
price because the opening price can be gamed to a greater extent by traders, relative to the volumeweighted average price. This is because the opening price is known with more certainty than the
VWAP. (Study Session 16, LOS 39.f)
This question tested from Session 16, Reading 30, LOS g.
Part 2)
Your answer: B was incorrect. The correct answer was C) Walker is correct.
Walker is correct. The implementation shortfall is perhaps the most accurate measure of trading
costs, it is not subject to gaming, and incorporates both explicit and implicit trading costs. (Study
Session 16, LOS 39.g)
This question tested from Session 16, Reading 30, LOS g.
Part 3)
Your answer: B was incorrect. The correct answer was A) 0.16%.
The 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 the proportion of the order filled. It is (800/1000) x ($20.07-$20.03)/$20.00 = 0.16%.
The positive value means that there is a loss (a cost) here. (Study Session 16, LOS 39.g)
This question tested from Session 16, Reading 30, LOS g.
Part 4)
Your answer: B was incorrect. The correct answer was C) 0.12%.
The delay costs are calculated using the difference between the closing price 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

(800/1000) x ($20.03-$20.00)/$20.00 = 0.12%. (Study Session 16, LOS 39.g)
This question tested from Session 16, Reading 30, LOS g.
Part 5)
Your answer: B was correct!
The 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 (200/1000) x ($20.09-$20.00)/$20.00 = 0.09%. (Study Session 16, LOS 39.g)
This question tested from Session 16, Reading 30, LOS g.
Part 6)
Your answer: B was incorrect. The correct answer was A) 0.44%.
To calculate the implementation shortfall, we must also add in the explicit costs, which are the
commission as a percent of the paper portfolio investment: $14/$20,000 = 0.07%. The total
implementation cost is the sum of the explicit costs, the realized profit and loss, the delay costs
component, and the missed trade opportunity cost component: 0.07%+0.16%+0.12%+0.09% =
0.44%. (Study Session 16, LOS 39.g)
This question tested from Session 16, Reading 30, LOS g.
Question 17 - #91931
Your answer: A was correct!
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.
This question tested from Session 16, Reading 30, LOS i.
Question 18 - #91982
Your answer: B was correct!
If a trader placed a sell order, a dealer may offer a better bid price than the previous bid to earn the
trader’s business. The midquote of the quoted bid and ask prices is $16.05. The effective spread for
this sell order would then be calculated as: 2 × ($16.05 - $16.03) = $0.04, which is 6 cents better than
the quoted spread of $0.10 ($16.10 - $16.00).
This question tested from Session 16, Reading 30, LOS b.

Question 19 - #92168
Your answer: B was incorrect. The correct answer was C) Placing the trade with a broker.
If a trade is of relatively large size and has a large spread, it should be traded through a skilled broker
or through a crossing system to minimize the spread.
This question tested from Session 16, Reading 30, LOS m.
Question 20 - #93178
Your answer: B was correct!
The factors contributing to liquidity are an abundance and diversity of traders, convenience, and
integrity. Homogenous traders are not diverse.
This question tested from Session 16, Reading 30, LOS e.
Question 21 - #92285
Your answer: B was incorrect. The correct answer was C) hire independent outside consultants to
ensure best execution.
The CFA Institute’s Trade Management Guidelines do not require that investment management firms
hire independent outside consultants to ensure best execution.
This question tested from Session 16, Reading 30, LOS o.
Question 22 - #92514
Your answer: A was correct!
Buy-side traders and portfolio managers have a fiduciary duty to maximize the value of their client’s
portfolio. Smith’s higher commissions should prevent Rolle from trading with him. The buy-side
trader’s relationships with sell-side traders must never come before the interests of their clients.
There is no evidence that Smith has done anything improper, so reporting him to the exchange
regulators is unnecessary.
This question tested from Session 16, Reading 30, LOS p.
Question 23 - #93082
Your answer: B was incorrect. The correct answer was C) The relationship between buy-side and
sell-side traders is becoming less adversarial.
Brokerage commissions have fallen dramatically. The temptation is to shift costs to those that are
implicit, rather than explicit. Thus, trading between buy-side and sell-side traders is becoming more

adversarial. Furthermore, the disclosure of information in a trade can be used against a trader later
on, especially with the advent of electronic trading venues where trader identity can be kept
confidential. Thus, trust has become more important given the potential negative ramifications of
trading with an unscrupulous trader.
This question tested from Session 16, Reading 30, LOS p.
Question 24 - #92135
Your answer: B was correct!
A market order is an order to execute the trade immediately at the best possible price. The emphasis
in a market order is the speed of execution (the reduction of execution uncertainty). The
disadvantage of a market order is that the price it will be executed at is not known ahead of time, it
thus has price uncertainty.
This question tested from Session 16, Reading 30, LOS a.
Question 25 - #92122
Your answer: B was incorrect. The correct answer was C) reduced price uncertainty but retains
execution uncertainty.
A limit order is an order to trade at the best possible price, subject to the price satisfying the limit
price. A limit order emphasizes the price of execution (the reduction of price uncertainty). It
however, may not be filled immediately and may even go unfilled or partially unfilled. A limit order
thus has execution uncertainty.
This question tested from Session 16, Reading 30, LOS a.
Question 26 - #91598
Your answer: B was incorrect. The correct answer was C) Market prevalence.
A security market should be judged on the basis of its liquidity and assurity of completion.
This question tested from Session 16, Reading 30, LOS e.
Question 27 - #92106


Your answer: B was incorrect. The correct answer was C) A limit order.
A limit order is an order to trade at the best possible price, subject to the price satisfying the limit
price. For buy orders, the execution price (here $39.88) must be lower or equal to the limit price

(here $40). Limit orders also have an expiration date, beyond which they expire.
This question tested from Session 16, Reading 30, LOS a.
Question 28 - #91607
Your answer: B was correct!
In an electronic crossing network, trades are executed at the average of the bid and ask quotes. They
do not adjust based on supply and demand. As such, prices do not adjust to fill orders. In an auction
market and automated auctions (also known as electronic limit-order markets), orders compete for
execution and prices can adjust to fill orders.
This question tested from Session 16, Reading 30, LOS c.
Question 29 - #91844
Your answer: B was incorrect. The correct answer was A) Electronic crossing networks.
In an electronic crossing network, there is no price discovery because trades are executed at the
average of the bid and ask quotes. The trader usually does not know the identity of their counterparty
or of their trade size. In an auction market and automated auctions (also known as electronic limitorder markets), orders compete for execution and provide price discovery.
This question tested from Session 16, Reading 30, LOS c.
Question 30 - #92372
Your answer: B was incorrect. The correct answer was C) The opportunity costs are 0.06% 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%.
This question tested from Session 16, Reading 30, LOS g.
Question 31 - #92309
Your answer: B was incorrect. The correct answer was C) should be judged independently of the
investment decision.
Best execution cannot be judged independently of the investment decision. Prudence and best
execution both attempt to improve portfolio performance and meet fiduciary responsibilities.
Relationships and practices are integral to best execution.
This question tested from Session 16, Reading 30, LOS n.
Question 32 - #91599
Your answer: B was incorrect. The correct answer was C) Trader and dealer.
The relationship between a trader and a dealer is adversarial. The dealer would like to maximize the
trade spread and the trader would like to minimize it. Also, when a trader has information that the
dealer does not, the trader profits at the dealer’s expense.
This question tested from Session 16, Reading 30, LOS d.
Question 33 - #92297
Your answer: A was incorrect. The correct answer was C) must not disclose documentation
concerning policies and procedures to outside parties.
Documentation concerning policies and procedures to outside parties should be disclosed to outside
regulators, not held within the firm. The CFA Institute’s Trade Management Guidelines state that in


regard to record keeping, investment management firms should maintain the documentation
supporting: 1) the firm’s compliance with its policies and procedures; and 2) disclosures made to its
clients. In doing so, the firm provides evidence to regulators as to how the firm pursues best
execution for its clients.
This question tested from Session 16, Reading 30, LOS o.
Question 34 - #91985
Your answer: B was correct!

If a trader placed a buy order, a dealer may offer a better ask price than the previous ask to earn the
trader’s business. The midquote of the quoted bid and ask prices is $30.035. The effective spread for
this buy order would then be calculated as: 2 × ($30.04 - $30.035) = $0.01, which is 6 cents better
than the quoted spread of $0.07 ($30.07 - $30.00).
This question tested from Session 16, Reading 30, LOS b.
Question 35 - #92457
Part 1)
Your answer: B was correct!
This is true because a market order can be executed at any price. The limit order may never get
executed if the price does not fall into the specified range. (Study Session 16, LOS 39.a)
This question tested from Session 16, Reading 30, LOS l.
Part 2)
Your answer: A was incorrect. The correct answer was B) $0.06
The effective spread is twice the difference between the execution price and the average of the
bid/ask spread at the time of the order: $0.06=2 × [$24.45 –($24.44 + $24.40)/2]. (Study Session 16,
LOS 39.b)
This question tested from Session 16, Reading 30, LOS l.
Part 3)
Your answer: B was incorrect. The correct answer was A) delay costs.
The term delay costs refers to the inability to complete the desired trade immediately because of its
size and the liquidity of markets. Delay costs are often measured on the portion of the order carried
over from one day to the next. (Study Session 16, LOS 39.g)
This question tested from Session 16, Reading 30, LOS l.
Part 4)
Your answer: B was correct!
White was wrong because non-linear models can be more effective than linear models. Plain is
correct because the models can estimate the optimal size of the trade. (Study Session 16, LOS 39.i)
This question tested from Session 16, Reading 30, LOS l.
Part 5)
Your answer: B was correct!

Algorithmic trading is ideal for a stock that has a low bid/ask spread. The trades should have a low
urgency level and be small with respect to the average volume of that stock. (Study Session 16, LOS
39.l)
This question tested from Session 16, Reading 30, LOS l.
Part 6)
Your answer: B was incorrect. The correct answer was C) opportunistic participation strategies.
Opportunistic participation strategies involve passive trading combined with the opportunistic
seizing of liquidity. The most common examples are pegging and discretion strategies. In these
strategies, the potential buyer posts a bid and hopes others will sell to him and that this will yield
negative implicit trading costs. (Study Session 16, LOS 39.l)
This question tested from Session 16, Reading 30, LOS l.
Question 36 - #92063
Your answer: B was correct!
In an electronic crossing network, orders are executed at the average of the bid and ask quotes. Prices
do not adjust based on supply and demand.
This question tested from Session 16, Reading 30, LOS a.
Question 37 - #93093


Your answer: B was incorrect. The correct answer was A) early in the day and attempts to minimize
opportunity costs.
Implementation shortfall strategies trade heavier early in the day to ensure order completion, reduce
opportunity costs, and minimize the volatility of trading costs.
This question tested from Session 16, Reading 30, LOS l.
Question 38 - #91606
Your answer: B was incorrect. The correct answer was C) price in their trading and use limit orders.
Passive traders can afford to be very patient and price, not time is their emphasis. They favor limit
orders.
This question tested from Session 16, Reading 30, LOS j.
Question 39 - #92454

Your answer: B was incorrect. The correct answer was A) ABCD should be traded using a simple
logical participation strategy, LMNO should be traded using a shortfall implementation strategy, and
WXYZ should be placed with a broker.
The trade for stock WXYZ is large relative to average daily trading volume (75,000/150,000 = 50%)
and has a large spread. Because of these characteristics, it should be traded through a skilled broker
or through a crossing system to minimize the spread. The trade for stock ABCD is relatively small
(20,000/400,000 = 5%) and the spread is low. The ABCD trade is of low urgency and can be traded
over time. It is thus suitable for a simple participation strategy based on VWAP or other benchmark.
The LMNO trade is of small relative size (60,000/1,000,000 = 6%), has small spreads, and high
urgency. It should be traded more quickly using an implementation shortfall strategy.
This question tested from Session 16, Reading 30, LOS m.
Question 40 - #91804
Your answer: B was incorrect. The correct answer was A) time in their trading and use market
orders.
Information-motivated traders have information that is time sensitive, and if they do not trade
quickly, the value of their information will expire. They, therefore, emphasize time in their trades.
They use market orders to execute quickly and because these orders are less noticeable.
This question tested from Session 16, Reading 30, LOS j.
Question 41 - #91603
Your answer: A was incorrect. The correct answer was B) Liquidity-at-any-cost.
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.
This question tested from Session 16, Reading 30, LOS k.
Question 42 - #91602
Your answer: B was incorrect. The correct answer was C) Trader and dealer.
A trader is more likely to trade with a dealer when he has information that the dealer does not. This
results in adverse selection risk for the dealer. The trader’s profit is the dealer’s loss once the
information is revealed to the market.
This question tested from Session 16, Reading 30, LOS d.

Question 43 - #92182
Your answer: B was incorrect. The correct answer was A) The use of an implementation shortfall
strategy.
Trades that are a small portion of average daily trading volume, with low spreads, and high urgency
should be traded with an implementation shortfall strategy. These strategies trade early in the day
and would accommodate an urgent trade.
This question tested from Session 16, Reading 30, LOS m.
Question 44 - #91448
Your answer: B was incorrect. The correct answer was C) with market flow and attempts to
minimize market impact.
Simple logical participation strategies seek to trade with market flow to minimize market impact.
This question tested from Session 16, Reading 30, LOS l.
Question 45 - #91902


Your answer: B was incorrect. The correct answer was C) Market model alpha.
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.
This question tested from Session 16, Reading 30, LOS i.
Question 46 - #92042
Your answer: B was correct!
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.
This question tested from Session 16, Reading 30, LOS h.

Question 47 - #91601
Your answer: B was correct!
A principal-agent relationship exists between a trader and the broker. The broker acts as the trader’s
agent and locates the necessary liquidity at the best price. The trader can also extract information
from the broker regarding the depth of a market and the identity of other traders.
This question tested from Session 16, Reading 30, LOS d.
Question 48 - #92729
Your answer: B was incorrect. The correct answer was A) Delay costs.
When an order is not filled, delay or slippage costs result. These costs can be substantial if
information regarding the security is released while the order sits unfilled.
This question tested from Session 16, Reading 30, LOS f.
Question 49 - #92691
Your answer: B was incorrect. The correct answer was A) The implicit costs are -$60.
Implicit costs are usually measured using some benchmark, such as the VWAP. VWAP is a
weighted average of security prices during a day, where the weight applied is the proportion of the
day’s trading volume. If the VWAP during a day was $21 and 100 shares were bought at $20.40,
then the estimate of the implicit cost would be 100 × ($20.40-$21.00) = -$60. The explicit costs in a
trade are the commissions, taxes, stamp duties, and fees.
This question tested from Session 16, Reading 30, LOS f.
Question 50 - #92498
Your answer: B was incorrect. The correct answer was A) Best execution should be measured over
short, relevant time periods.
Although best execution can be measured ex post over time, it should not be used to evaluate trading
effectiveness over a short time span. Buy-side traders and portfolio managers have a fiduciary duty
to maximize the value of their client’s portfolio.
This question tested from Session 16, Reading 30, LOS p.
Question 51 - #91868
Your answer: A was correct!
Steele is an information-motivated trader. These traders have information that is time sensitive, and
if they do not trade quickly, the value of their information will expire. They use market orders to

execute quickly and because these orders are less noticeable.
This question tested from Session 16, Reading 30, LOS j.
Question 52 - #91831
Your answer: B was correct!
Value-motivated traders are patient and will use limit orders, because price, not time is their main
objective.
This question tested from Session 16, Reading 30, LOS j.
Question 53 - #91605
Your answer: B was incorrect. The correct answer was C) Broker markets.


In brokered markets, brokers find the counterparties to a trade. This service is valuable when the
trader has a large block to sell, when they want to remain anonymous, and/or when the market for the
security is small or illiquid. Brokered markets are important in countries where public capital
markets are not well developed.
This question tested from Session 16, Reading 30, LOS c.
Question 54 - #92529
Your answer: B was correct!
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%.
This question tested from Session 16, Reading 30, LOS g.
Question 55 - #92802
Your answer: B was incorrect. The correct answer was C) Market impact costs.
The explicit costs in a trade are readily discernable and include commissions, taxes, stamp duties,

and fees. Implicit costs sometimes cannot be measured as easily but do exist. They include the bidask spread, market or price impact costs, opportunity costs, and delay costs (a.k.a. slippage costs).
This question tested from Session 16, Reading 30, LOS f.
Question 56 - #91965
Your answer: B was correct!
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.
This question tested from Session 16, Reading 30, LOS h.
Question 57 - #92496
Your answer: A was incorrect. The correct answer was 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.
This question tested from Session 16, Reading 30, LOS g.