Market Comparison
The following sections compare and contrast trading within the following markets: Equities. Fixed income. Exchange-traded derivatives (options and futures). Off-exchange (OTC) derivatives. Spot currencies. Equities Equities offer the most robust and viable platform for electronic trading. Equities are the most…
Trade Execution
Algorithmic trading is the practice of using programmed strategies to electronically trade orders. This practice is common in most equity, foreign exchange, and exchange-traded derivative markets. As with fixed income, algorithmic execution is mostly limited to trading highly liquid government…
Trading Strategies
The goal of any trade is to find a balance between the cost of execution and other risks with the benefits expected from executing the trade. Various trades have differing desired outcomes (i.e., making a quick profit vs. rebalancing a…
Benchmarks for Trade Execution
Reference prices, also called price benchmarks, are specified prices, price-based calculations, or price targets used to select and execute a trade strategy. Traders use reference prices to determine the effectiveness of their trades, both past and proposed. According to the…
Trading Strategies and Strategy Selection
Trade strategy inputs refer to the characteristics that inform the particular trade strategy chosen. The goal is to maximize the benefit of the trade, taking into consideration costs and risks. The following are the main inputs used in trade strategy…
Motivations to Trade
Portfolios must be created and maintained to reflect the risk/return characteristics of the ultimate beneficiaries. This section discusses the different reasons why managers need to trade. While active managers have more motivation to trade, even passive managers will need to…
Tactical Asset Allocation
Institutional investors often employ an active risk budget, typically gauging how much their portfolio deviates from the investment policy targets annually, often as a tracking error limit. This limit might be increased to seek higher returns or decreased to reduce…
Selecting an Asset Manager
It is a fact that the Code of Ethics and Standards of Professional Conduct apply to all CFA stakeholders and that candidates hoping to pass the exams need to be well versed in the Ethics material. This Los provides a…
Asset Allocation and Portfolio Construction
This section of the curriculum presents a case in which a university endowment is deciding on its asset allocation, as well as its liquidity needs. This summary may be used in conjunction with the reading as a synopsis or may…
lIlliquidity Premium
An illiquidity premium is a return earned by investors for the commitment of capital for an uncertain amount of time. In other words, it is a charge for the usage of money. Illiquidity, or liquidity premiums as they are also…
