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Reading 31 Execution of Portfolio Decisions FinQuiz.com FinQuiz.com CFA Level III Item-set - Question Study Session 16 June 2018 Copyright © 2010-2018 FinQuiz.com All rights reserved Copying, reproduction or redistribution of this material is strictly prohibited info@finquiz.com FinQuiz.com © 2018 - All rights reserved Reading 31 Execution of Portfolio Decisions FinQuiz.com FinQuiz Item-set ID: 13345 Questions 1(13346) through 6(13351) relate to Reading 31 Louise Chung Case Scenario Louise Chung is a senior broker working for Eroba Associates (EA), a brokerage firm EA has received an order to purchase 700 shares of Chloe Chemicals, a publically listed chemicals manufacturer, from Lestor Inc Details on execution prices and trading times at which the orders were executed are illustrated in the exhibit below Exhibit Bid-Ask Quotes for Chloe Chemicals on May 12, 2008 Time Entered Bid Price Bid Size Ask Price Ask Size Execution Price Shares Purchased 10:21 a.m $1.456 100 $1.462 250 $1.460 100 10:40 a.m $1.466 100 $1.472 250 $1.472 250 11:15 a.m $1.478 100 $1.480 250 $1.490 350 In addition to the purchase order received from Lestor Inc., Eroba Associates has received an order to purchase 6,000 shares of Chrome Chemicals at a limit price of $15.56 on May 17 from Jeromine Tait Manufacturers The closing price of Chrome Chemicals on May 16th was $15.00 The order goes unfulfilled and the closing price on May 17th for the chemicals manufacturer is $16.15 The next day (May 18) EA executes 45% of the order at the current market price of $17.00 The remaining order is cancelled and the market closes on May 18 with the shares price rising to $17.34 EA maintains an ordering system which keeps a record of all unfulfilled trade orders currently in process Each order is assigned a symbol generated automatically by the system Details on three of these orders are illustrated in the exhibit below Exhibit EA’s Order Management System Symbol Size (Shares) Average Daily Volume Price Spread (%) Urgency ABC 150,000 170,000 35.75 0.05 High DEF 25,000 125,000 15.74 0.43 High GHI 200,000 1,000,000 57.53 0.03 Low Berome Inc is a pension fund manager utilizing EA’s brokerage services to conduct portfolio trades on behalf of its pension fund corporate clients Berome Inc has stated to EA, “Our FinQuiz.com © 2018 - All rights reserved Reading 31 Execution of Portfolio Decisions FinQuiz.com portfolio clients’ risk aversion ranges from high to moderate We trust you, as our broker, to execute portfolio trades in a calculated manner delivering optimal portfolio results We not ask for immediate execution but would prefer if you keep in mind our large trade orders and accordingly conduct trading on behalf of our clients.” Jeromine Tait Manufacturers, on the other hand, has repeatedly expressed their desire to minimize trading costs The manufacturing company has expressed a desire to keep their identity shielded from the market since they would like to execute large orders with minimal price impact The manufacturing firm frequently invests in emerging market equity securities possessing characteristics which differ considerably from developed market securities However, the firm would prefer to avoid engaging any intermediary when executing its trades FinQuiz Question ID: 13346 Using the data in exhibit 1, the average effective spread on Chloe Chemical’s stock is closest to: A − $0.030 B + $0.005 C + $0.010 FinQuiz Question ID: 13347 The most appropriate conclusion which may be derived from a comparison between the average effective and quoted bid-ask spreads associated with the Chloe Chemicals purchase order is: A there was a price improvement in the first trade B there was a price improvement in the second and last trade C the market has a high level of liquidity FinQuiz Question ID: 13348 The realized profit/loss (in % terms) generated on the Chrome Chemicals purchase order is closest to: A 2.46% B 2.55% C 6.00% FinQuiz.com © 2018 - All rights reserved Reading 31 Execution of Portfolio Decisions FinQuiz.com FinQuiz Question ID: 13349 Which of the following statements accurately captures the trading strategy most appropriate for the orders in process in EA’s ‘order management system’? A All three trades should be executed using an implementation shortfall strategy B Both ABC and DEF should be executed using an implementation shortfall strategy while GHI should be executed using a VWAP strategy C ABC should be executed using an implementation shortfall strategy, DEF should be executed using a broker, and GHI should be executed using a VWAP strategy FinQuiz Question ID: 13350 The trading focus exhibited by Berome Inc.’s statement to EA most likely reflects: A a low-cost-whatever-the-liquidity trading focus B a need-trustworthy-agent trading focus C a liquidity at any cost trading focus FinQuiz Question ID: 13351 The most appropriate market type for executing Jeromine Tait Manufacturers trade orders is a(n): A order-driven market B brokered market C quote-driven (dealer) market FinQuiz.com © 2018 - All rights reserved .. .Reading 31 Execution of Portfolio Decisions FinQuiz. com FinQuiz Item- set ID: 133 45 Questions 1( 133 46) through 6( 133 51) relate to Reading 31 Louise Chung Case Scenario... trades FinQuiz Question ID: 133 46 Using the data in exhibit 1, the average effective spread on Chloe Chemical’s stock is closest to: A − $0. 030 B + $0.005 C + $0.010 FinQuiz Question ID: 133 47 The... 2.55% C 6.00% FinQuiz. com © 2018 - All rights reserved Reading 31 Execution of Portfolio Decisions FinQuiz. com FinQuiz Question ID: 133 49 Which of the following statements accurately captures
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