ACFI 3018 APPLIED PORTFOLIO MANAGEMENT PROBLEM SET 1 Question 1 (10 marks) Investors need to be aware of transaction costs when executing an investment strategy. The three dimensions of transaction costs are brokerage fees, the bid-ask spread and price impact. a) In 100 words or less, explain why bid-ask spread is considered as a component of transaction cost. Explain the types of trades (both investor characteristics and size of the transection) that would tend to result in the price impact being the biggest contributor to overall transaction costs when executing a trade. (2 +2 marks)