Financial Market Microstructure Question 2-OPTIONAL Page 3 of 51 January 2022 2. (a) Rita has recently...

  

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Financial Market Microstructure Question 2-OPTIONAL Page 3 of 51 January 2022 2. (a) Rita has recently come across news that could inform her trading strategy on a stock issued by Wiley Brothers Ltd. On the first day, she observes a benchmark price at $11.50 on Tuesday, March 22nd. Rita is late to place her order but notes the closing price for Tuesday is $12.10. On Wednesday, Rita places a buy order for 10,000 shares at $12.05, good for the day (a day order). Her order is partially filled for 6500 shares at $12.12. Rita pays a flat commission of $100 and the shares of the company close at $12.13 that day. There are no further attempt to buy shares is made. Calculate the following: i. Commissions as a percent ii. Delay costs iii. Realized profit/loss: iv. Missed trade opportunity cost v. Implementation Shortfall (b) An investor has a holding period, h = 1 and the net return of an asset is expressed as follows: E(R, 8;) r+B,[E(Rm-8m)-r] (2 marks) (2 marks) (2 marks) (2 marks) (2 marks) where R, and R, are the asset's and market's gross return (respectively). 8, and 8m are the related percentage spreads and r is a riskless rate of return. i. Using suitable workings, show that the Acharya and Pedersen (2005) extension of the CAPM is expressed as: E(R)-r Bijλm + E(8) + Bajλm Bajλm Bajλm where A is the market risk premium ii. Given the adjusted CAPM above, discuss the implications of the decomposition on asset (4 marks) pricing. (6 marks) Total for Question 2: 20 marks Financial Market Microstructure Question 2-OPTIONAL Page 3 of 51 January 2022 2. (a) Rita has recently come across news that could inform her trading strategy on a stock issued by Wiley Brothers Ltd. On the first day, she observes a benchmark price at $11.50 on Tuesday, March 22nd. Rita is late to place her order but notes the closing price for Tuesday is $12.10. On Wednesday, Rita places a buy order for 10,000 shares at $12.05, good for the day (a day order). Her order is partially filled for 6500 shares at $12.12. Rita pays a flat commission of $100 and the shares of the company close at $12.13 that day. There are no further attempt to buy shares is made. Calculate the following: i. Commissions as a percent ii. Delay costs iii. Realized profit/loss: iv. Missed trade opportunity cost v. Implementation Shortfall (b) An investor has a holding period, h = 1 and the net return of an asset is expressed as follows: E(R, 8;) r+B,[E(Rm-8m)-r] (2 marks) (2 marks) (2 marks) (2 marks) (2 marks) where R, and R, are the asset's and market's gross return (respectively). 8, and 8m are the related percentage spreads and r is a riskless rate of return. i. Using suitable workings, show that the Acharya and Pedersen (2005) extension of the CAPM is expressed as: E(R)-r Bijλm + E(8) + Bajλm Bajλm Bajλm where A is the market risk premium ii. Given the adjusted CAPM above, discuss the implications of the decomposition on asset (4 marks) pricing. (6 marks) Total for Question 2: 20 marks

Answer rating: 100% (QA)

Lets calculate the requested values step by step 1 Commissions as a percent Total commission paid 100 Total value of shares bought 6500 shares 1212sha... View the full answer