Multiple Liabilities
Risks in LDI Strategies for Single and Multiple Liabilities Liability Driven Investment (LDI)... Read More
Implicit trading costs are also known as opportunity costs and include market impact costs. When a manager sells a significant amount of stock, the increased selling pressure can push down the security's price, resulting in a lower return for the sale.
Market impact costs are influenced by:
Slippage refers to the difference between the execution price and the midpoint of the quoted bid-ask spread when the trade was initiated. Slippage costs typically:
These factors imply that successful small-cap managers might struggle to scale their AUM due to growing slippage costs, while large-cap funds can more readily support increased AUM.
Question
Which of the following statements regarding slippage costs is least likely to be accurate?
- Slippage costs are generally higher for small-cap securities than for large-cap securities.
- Slippage costs are not necessarily higher in emerging markets.
- Slippage costs are substantially lower with increased market volatility.
Solution
The correct answer is C.
Option C is correct. Slippage costs tend to be higher with increased market volatility, not lower. This is because volatile markets can lead to larger price swings and increased potential for execution at less favorable prices due to rapid market movements.
A is incorrect. The statement is generally accurate. Small-cap securities often have lower liquidity, which can result in larger price fluctuations when trading, leading to higher slippage costs.
B is incorrect. The statement is generally accurate as well. Slippage costs can vary depending on various factors, and while emerging markets might have higher volatility, they can also have lower trading volumes, potentially affecting slippage costs in different ways.
Reading 26: Active Equity Investing: Portfolio Construction
Los 26 (f) Discuss how assets under management, position size, market liquidity, and portfolio turnover affect equity portfolio construction decisions