Consider a sequential trade model in which a security has an uncertain value. The valueVof the security can either be $50 or $70 with equal probability. The proportion of informed traders is 20%, whereas the proportion of liquidity traders is 80%. As usual, liquidity traders buy or sell withequalprobability, whereas informed traders only buy when they know the security price is high, and sell when they know the security price is low.

Question 1 1. Consider a sequential trade model in which a security has an uncertain value. The value V of the security can either be $50 or $70 with equal probability. The proportion of informed traders is 20%, whereas the proportion of liquidity traders is 80%. As usual, liquidity traders buy or sell with equal probability, whereas informed traders only buy when they know the security price is high, and sell when they know the security price is low. a. The unconditional expected value E (V) of the security is . b. a sell is The probability that V = $70, conditional that the first trade is . is The probability that V = $50, conditional that the first trade is a sell, . is The probability that V = $70, conditional that the first trade is a buy, . is The probability that V = $50, conditional that the first trade is a buy, . is The conditional expectation of V, conditional that the first trade is a sell, . c. d. e. f. g. The conditional expectation of V, conditional that the first trade is a buy, is Question 2 1. Consider a sequential trade model in which a security has an uncertain value. The value V of the security can either be $120 or $140 with equal probability. The proportion of informed traders is 30%, whereas the proportion of liquidity traders is 70%. As usual, liquidity traders buy or sell with equal probability, whereas informed traders only buy when they know the security price is high, and sell when they know the security price is low. a. The unconditional expected value E (V) of the security is . b. a sell is The probability that V = $140, conditional that the first trade is . is The probability that V = $120, conditional that the first trade is a sell, . is The probability that V = $140, conditional that the first trade is a buy, . is The probability that V = $120, conditional that the first trade is a buy, . c. d. e. f. is The conditional expectation of V, conditional that the first trade is a sell, . is The conditional expectation of V, conditional that the first trade is a buy, . g. Question 3 1. If I buy or sell a $20 stock for which the total one-way trading cost is 50 basis points, then the trading cost per share will be _____ per share. Question 4 1. If I buy or sell a $100 stock for which the total one-way trading cost is 30 basis points, then the trading cost per share will be _____ per share. Question 5 1. For a stock, the annual turnover is defined as: a Total annual trading volume (shares) / Number of . shares outstanding. b Total annual trading volume (in shares). . c Number of shares outstanding. . d None of the above. . Question 6 1. In measuring the Implementation Shortfall (IS) we compare the performance of an actual portfolio with the performance of an index. True False Question 7 1. In measuring the Implementation Shortfall (IS), a common benchmark price for hypothetical trades is the national best bid prevailing at the time the order was sent. True False Question 8 1. Intuitively, the VWAP measures the price paid by the average trader on a given day. True False