READING 29. EXECUTION OF PORTFOLIO DECISIONS

a compare market orders with limit orders, including the price and execution uncertainty of each;

b calculate and interpret the effective spread of a market order and contrast it to the quoted bid–ask spread as a measure of trading cost;

c compare alternative market structures and their relative advantages;

d compare the roles of brokers and dealers;

e explain the criteria of market quality and evaluate the quality of a market when given a description of its characteristics;

f explain the components of execution costs, including explicit and implicit costs, and evaluate a trade in terms of these costs;

g calculate and discuss implementation shortfall as a measure of transaction costs;

h contrast volume weighted average price (VWAP) and implementation shortfall as measures of transaction costs;

i explain the use of econometric methods in pretrade analysis to estimate implicit transaction costs;

j discuss the major types of traders, based on their motivation to trade, time versus price preferences, and preferred order types;

k describe the suitable uses of major trading tactics, evaluate their relative costs, advantages, and weaknesses, and recommend a trading tactic when given a description of the investor’s motivation to trade, the size of the trade, and key market characte

l explain the motivation for algorithmic trading and discuss the basic classes of algorithmic trading strategies;

m discuss the factors that typically determine the selection of a specific algorithmic trading strategy, including order size, average daily trading volume, bid–ask spread, and the urgency of the order;

n explain the meaning and criteria of best execution;

o evaluate a firm’s investment and trading procedures, including processes, disclosures, and record keeping, with respect to best execution;

p discuss the role of ethics in trading.

READING 30. MONITORING AND REBALANCING

a discuss a fiduciary’s responsibilities in monitoring an investment portfolio;

b discuss the monitoring of investor circumstances, market/economic conditions, and portfolio holdings and explain the effects that changes in each of these areas can have on the investor’s portfolio;

c recommend and justify revisions to an investor’s investment policy statement and strategic asset allocation, given a change in investor circumstances;

d discuss the benefits and costs of rebalancing a portfolio to the investor’s strategic asset allocation;

e contrast calendar rebalancing to percentage-of-portfolio rebalancing;

f discuss the key determinants of the optimal corridor width of an asset class in a percentage-of-portfolio rebalancing program;

g compare the benefits of rebalancing an asset class to its target portfolio weight versus rebalancing the asset class to stay within its allowed range;

h explain the performance consequences in up, down, and flat markets of 1) rebalancing to a constant mix of equities and bills, 2) buying and holding equities, and 3) constant proportion portfolio insurance (CPPI);

i distinguish among linear, concave, and convex rebalancing strategies;

j judge the appropriateness of constant mix, buy-and-hold, and CPPI rebalancing strategies when given an investor’s risk tolerance and asset return expectations.