Execution of Portfolio Decisions Flashcards

1
Q

Market-not-held order

A

A variation of the market order designed to give the agent greater discretion than a simple market order would allow. Not held means that the floor broker is not required to trade at any specific price or in any specific time interval

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2
Q

Participate (do not initiate) order

A

A variant of the market-not-held order. The broker is deliberately low-key and waits for and responds to the initiatives of more active traders

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3
Q

Undisclosed limit order (also known as a reserve, hidden, or iceberg order)

A

A limit order that includes an instruction not to show more than some maximum quantity of the unfilled order

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4
Q

Principal trade

A

A trade with a broker in which the broker commits capital to facilitate the prompt execution of the trader’s order to buy or sell

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5
Q

Portfolio trade (or program trade or basket trade)

A

An order that requires the execution of purchases (or sales) in a specified basket (list) of securities as close to the same time as possible

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6
Q

Straight-through processing

A

Systems that simplify transaction processing through the minimization of manual and/or duplicative intervention in the process from trade placement to settlement

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7
Q

Effective spread

A

Effective spread = 2× (Actual execution price - Mid-point of market quote at time of order entry)

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8
Q

Price discovery

A

Adjustment of transaction prices to balance supply and demand

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9
Q

Adverse selection risk

A

The risk associated with information asymmetry; in the context of trading, the risk of trading with a more informed trader

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10
Q

Resilient market

A

A market is resilient if any discrepancies between market price and intrinsic value tend to be small and corrected quickly

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11
Q

Transactions cost components

A
  • Bid-ask spread
  • Market impact
  • Missed trade opportunity costs
  • Delay costs
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12
Q

Implementation shortfall components

A
  • Commissions (commissions/original paper portfolio value)
  • Realized profit/loss (execution price - closing price of the prior day)
  • Delay (closing price of the prior day - closing price of the decision day)
  • Missed trade opportunity (final price - closing price of the decision day)
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13
Q

Sunshine trades

A

Public display of a transaction (usually high-volume) in advance of the actual order

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14
Q
  • Constant-Mix Strategy
  • Constant-Proportion Strategy: CPPI
A
  • Target investment in stocks = m × Portfolio value
  • Target investment in stocks = m × (Portfolio value – Floor value)
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15
Q

Buy-and-hold vs rebalancing

A

Perold-Sharpe analysis clearly illustrates that a buy-and-hold strategy can be expected to outperform a rebalancing discipline in an upward trending market

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16
Q

Missed trade opportunity cost

A

= (closing price) – (ask price at order entry)

17
Q

Risk tolerance for a buy-and-hold strategy

A

A buy-and-hold strategy implies that an investor’s risk tolerance is positively related to wealth. Such an approach is most effective in trending markets. Buy-and-hold provides a portfolio value that is a linear function of the stocks’ value

18
Q

A constant-mix strategy - trending vs reverting markets

A

This strategy is least successful when markets are trending but does offer superior returns when markets are characterized by reversals

19
Q

Perold–Sharpe Rebalancing Strategies

A
  • When m is greater than 1, the strategy is called constant-proportion portfolio insurance (CPPI)
  • When m equals than 1, the strategy is equivalent to a buy-and-hold strategy
  • When m is less than 1, an investor desires to hold stocks at all levels of wealth
20
Q

Summary of Perold–Sharpe Strategies

A
21
Q

A Need-Trustworthy-Agent-Focus appropriateness

A

A Need-Trustworthy-Agent-Focus is appropriate when low-level advertising is required during execution and the trades are sensitive to possible information leaks. It is least appropriate when a trade requires a high certainty of execution

22
Q

VWAP attempts to measure

A
  • The price benchmark for a trade with greater precision than other measures
  • Missed trade opportunity costs are difficult to measure, and VWAP does little to resolve those difficulties
  • Market impact costs are similarly difficult to measure
23
Q

Summary of Trading Motivations, Time Horizons, and Time versus Price Preferences

A
24
Q

Objectives in trading

A
25
Q

Determining if dealers/specialists provide price improvement

A

Price improvement is provided when the effective spread is lower than the quoted spread

26
Q

Disavandtages of shopping the order

A
  • Delay costs
  • Information leakage
27
Q

Costs and market impact of trading a basket of stocks versus trading these stocks individually

A
  • The price of tradings a basket of stocks is lower because:
    1. There is less information leakage as other participants will not believe that this transaction is information-motivated
    2. A single quoted can be obtained for the entire basket by a broker
28
Q

Comparison of VWAP and Implementation Shortfall

A
29
Q

Portfolio turnover

A

Is the lower of total purchases or total sales divided by the average monthly assets

30
Q

Slippage costs

A
  • Are usually more important than commission costs
  • Are greater for small-cap than for large-cap
31
Q

Factors affecting the optimal corridor width of an asset class

A