Trading, Manager Selection And Appraisal

Question 1

Capture ratio greater than 1

Answer 1

Positive assymetry
Convex return profile

Question 2

Factor model based benchmark

Answer 2

Involve relating a specified set of factor exposures to the returns on an account

Question 3

Returns based attribution

Answer 3

Regresses total portfolio returns against major risk factors to identify the active bets of the manager and their impact on active returns

Question 4

Holdings based attribution

Answer 4

Uses beginning of period portfolio holdings to assess the active sector/stock selection bets of the manager and their contribution to active returns

Question 5

Transaction based attribution

Answer 5

Improves upon the holdings based attribution by including the impact of any trades executed during the evaluation period

Question 6

Micro attribution

Answer 6

Analyses the portfolio at the portfolio manager’s level

Question 7

Macro attribution

Answer 7

Analyses investment decisions at the fund sponsor’s level. Commonly used with institutional investing

Question 8

POV algorithm

Answer 8

send orders according to a price participation schedule

Question 9

liquidity seeking algorithms

Answer 9

aim to take advantage of favourable liquidity condiitons when offered by the market

Question 10

arrival price algortihm

Answer 10

seek to trade close to market prices prevailing at the time the order was entered

Question 11

Smart order routers

Answer 11

Algorithms that determine the best destination to route an electronic order to get the best result.
focus on getting the best price or highest probability of execution for limit orders

Question 12

schedule algo when to use

Answer 12

for relatively small orders in liquid markets for managers with less urgency who are concerned with minimizing market impact

Question 13

when to use liquidity seeking algos

Answer 13

for larger orders in less liquid markets with higher urgency while trying to mitigate market impact

Question 14

when to use arrival price algos

Answer 14

relatively small orders in liquid markets for managers who believe prices are likely to move against them during the trade horizon, and therefore wish to trade more aggressively

Question 15

when dark strategies

Answer 15

• large orders
• illiquid markets
• when arrival price and scheduled algos will lead to higher impact costs
• managers that do not need to execute the order immediately

Question 16

when SOR algos

Answer 16

• small market orders
• low market impact
• low information leakage

Question 17

Clustering

Answer 17

Machine learning technique whereby a computer learns to identify which algorithm is optimal for different types of trades based on the key features of the trades
- grouping similar types of trade

Question 18

high frequency market forecasting

Answer 18

attempts to model short term market direction

Question 19

pretrade benchmarks

Answer 19

• decision price
• previous close
• opening price
• arrival price

Question 20

Intraday benchmark

Answer 20

• twap
• vwap