QUESTION SET 5
TOPIC: PORTFOLIO CONSTRUCTION
TOTAL POINT VALUE OF THIS QUESTION SET IS 12 POINTS
Nate Johnson is the chief investment officer at Merrimack Money Managers (MMM), a
boutique hedge fund based in the US. After a recent meme stock event that triggered
price disruption, Johnson is meeting with Sergey Anosov, head trader at MMM, to
review recent trading activity, trading strategies, and execution costs.
After reviewing the data in Exhibit 1, Anosov explains the components of execution
costs and effective spreads and makes the following statements:
Statement 1: The effective spread is a poor estimate of actual transaction costs when small orders receive price improvement.
Statement 2: Implementation shortfall compares the value of the actual portfolio with
that of a paper portfolio constructed on the assumption that the trades
could be executed at the volume-weighted average price.
C. Determine which statement made by Anosov is most likely incorrect.
(Statement 1, Statement 2)
Justify your response
参考答案
Statement 2 is incorrect because implementation shortfall does not involve a
comparison to the volume-weighted average price.
Implementation shortfall compares the value of the actual portfolio with that of a paper
portfolio constructed on the assumption that trades could be arranged at the prices that
prevailed when the decision to trade was made. The prevailing price – also called the
decision price, the arrival price, or the strike price – is generally taken to be the
midquote price at the time of the trade decision. The excess of the paper value over the
actual value is the implementation shortfall.
Statement 1 is correct because the effective spread is a poor estimate of actual
transaction costs when traders split large orders into many parts to fill over time or when
small orders receive price improvement.
参考答案选2， 答案中不只提到了2是不对的，还解释了1为什么对。考试的时候时间紧张，像类似的题型需要写出1的原因吗？还是只写选择那项recommendation 2的原因就可以了
