Learning Goal: I’m working on a finance multi-part question and need an explanation and answer to help me learn.
Q.1. In a report dated December 15, 2004, the Office of Economic Analysis of the U.S. Securities and Exchange Commission (SEC) compared trade execution quality on the NYSE and NASDAQ using a matched sample of 113 pairs of firms. The comparison is based on six months of data from January to June 2004. The results regarding which market has the better execution quality (NYSE or NASDAQ) vary across order size, firm size, and order type. The results below are for small market orders (100–499 shares) in shares of large market capitalization firms.
Spread (cents) | NASDAQ | NYSE |
Quoted spread | 2.737 | 2.791 |
Effective spread | 2.650 | 2.490 |
On the basis of the above results, address the following:
Q.2. Consider some stocks that trade in two markets, with a trader being able to trade in these stocks in either market. Suppose that the two markets are identical in all respects except that bid–ask spreads are lower and depths (the number of shares being offered at the bid and ask prices) are greater in one of the two markets. State in which market liquidity-motivated and information-motivated traders would prefer to transact. Justify your answer.
Q.3. Evaluate the most likely effects of the following events on the investor’s investment objectives, constraints, and financial plan.
Q.4. Duane Rogers, as chief investment officer (CIO) for the Summit PLC defined-benefit pension scheme, has developed an economic forecast for presentation to the plan’s board of trustees. Rogers projects that U.K. inflation will be substantially higher over the next three years than the board’s current forecast.
Rogers recommends that the board immediately take the following actions based on his forecast:
State whether each recommended action is correct or incorrect. Justify each of your responses with one reason
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