Consider a sequential trade model in which a security has an uncertain value. The value V of the security can either be $150 or $250 with equal probability. The proportion of informed traders is 40%,

1. Consider a sequential trade model in which a security has an uncertain value. The value V of the security can either be $150 or $250 with equal probability. The proportion of informed traders is 40%, whereas the proportion of liquidity traders is 60%. As usual, liquidity traders buy or sell with equalprobability, whereas informed traders only buy when they know the security price is high, and sell when they know the security price is low.

   The conditional expectation of V, conditional that the first trade is a buy, is:

   a.

   E[V | Buy] = 170

   b.

   E[V | Buy] = 180

   c.

   E[V | Buy] = 200

   d.

   E[V | Buy] = 220

   e.

   E[V | Buy] = 230

   f.

   None of the above.

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 $150 or $250 with equal probability. The proportion of informed traders is 60%, whereas the proportion of liquidity traders is 40%. As usual, liquidity traders buy or sell with equalprobability, whereas informed traders only buy when they know the security price is high, and sell when they know the security price is low.

   The conditional expectation of V, conditional that the first trade is a sell, is:

   a.

   E[V | Sell] = 170

   b.

   E[V | Sell] = 180

   c.

   E[V | Sell] = 200

   d.

   E[V | Sell] = 220

   e.

   E[V | Sell] = 230

   f.

   None of the above.

1. Consider a sequential trade model in which a security has an uncertain value. The value V of the security can either be $170 or $250 with equal probability. The proportion of informed traders is 50%, whereas the proportion of liquidity traders is 50%. As usual, liquidity traders buy or sell with equalprobability, whereas informed traders only buy when they know the security price is high, and sell when they know the security price is low.

   The conditional expectation of V, conditional that the first trade is a buy, is:

   a.

   E[V | Sell] = 190

   b.

   E[V | Sell] = 180

   c.

   E[V | Sell] = 210

   d.

   E[V | Sell] = 220

   e.

   E[V | Sell] = 230

   f.

   None of the above.

Question 4

1. Consider a sequential trade model in which a security has an uncertain value. The value V of the security can either be $150 or $250 with equal probability. The proportion of informed traders is 60%, whereas the proportion of liquidity traders is 40%. As usual, liquidity traders buy or sell with equalprobability, whereas informed traders only buy when they know the security price is high, and sell when they know the security price is low.

   The probability that V = $250, conditional that the first trade is a buy, is:

   a.

   P[V = 250 | Buy] = 0.2

   b.

   P[V = 250 | Buy] = 0.3

   c.

   P[V = 250 | Buy] = 0.5

   d.

   P[V = 250 | Buy] = 0.7

   e.

   P[V = 250 | Buy] = 0.8

   f.

   None of the above.

Question 5

1. Consider a sequential trade model in which a security has an uncertain value. The value V of the security can either be $150 or $250 with equal probability. The proportion of informed traders is 40%, whereas the proportion of liquidity traders is 60%. As usual, liquidity traders buy or sell with equalprobability, whereas informed traders only buy when they know the security price is high, and sell when they know the security price is low.

   The probability that V = $150, conditional that the first trade is a sell, is:

   a.

   P[V = 150 | Sell] = 0.2

   b.

   P[V = 150 | Sell] = 0.3

   c.

   P[V = 150 | Sell] = 0.5

   d.

   P[V = 150 | Sell] = 0.7

   e.

   P[V = 150 | Sell] = 0.8

   f.

   None of the above.

Question 6

1. In the sequential trade model, if the uncertainty about V increases:

   a.

   The bid-ask spread goes down.

   b.

   The bid-ask spread stays unchanged.

   c.

   The bid-ask spread goes up.

   d.

   It is not clear what happens to the bid-ask spread.

Question 7

1. Consider a sequential trade model in which a security has an uncertain value. The value V of the security can either be $170 or $250 with equal probability. The proportion of informed traders is 50%, whereas the proportion of liquidity traders is 50%. As usual, liquidity traders buy or sell with equalprobability, whereas informed traders only buy when they know the security price is high, and sell when they know the security price is low.

   The unconditional expected value of the security is:

   a.

   E[V] = $170

   b.

   E[V] = $180

   c.

   E[V] = $210

   d.

   E[V] = $220

   e.

   E[V] = $250

   f.

   None of the above.

Question 8

1. Consider a sequential trade model in which a security has an uncertain value. The value V of the security can either be $150 or $250 with equal probability. The proportion of informed traders is 60%, whereas the proportion of liquidity traders is 40%. As usual, liquidity traders buy or sell with equalprobability, whereas informed traders only buy when they know the security price is high, and sell when they know the security price is low.

   The probability that V = $150, conditional that the first trade is a buy, is:

   a.

   P[V = 150 | Buy] = 0.2

   b.

   P[V = 150 | Buy] = 0.3

   c.

   P[V = 150 | Buy] = 0.5

   d.

   P[V = 150 | Buy] = 0.7

   e.

   P[V = 150 | Buy] = 0.8

   f.

   None of the above.

Question 9

1. Consider a sequential trade model in which a security has an uncertain value. The value V of the security can either be $170 or $250 with equal probability. The proportion of informed traders is 50%, whereas the proportion of liquidity traders is 50%. As usual, liquidity traders buy or sell with equalprobability, whereas informed traders only buy when they know the security price is high, and sell when they know the security price is low.

   The probability that V = $170, conditional that the first trade is a buy, is:

   a.

   P[V = 170 | Buy] = 0.25

   b.

   P[V = 170 | Buy] = 0.35

   c.

   P[V = 170 | Buy] = 0.50

   d.

   P[V = 170 | Buy] = 0.65

   e.

   P[V = 170 | Buy] = 0.75

   f.

   None of the above.

Question 10

1. Consider a sequential trade model in which a security has an uncertain value. The value V of the security can either be $150 or $250 with equal probability. The proportion of informed traders is 40%, whereas the proportion of liquidity traders is 60%. As usual, liquidity traders buy or sell with equalprobability, whereas informed traders only buy when they know the security price is high, and sell when they know the security price is low.

   The dealer will set his bid at:

   a.

   Bid = 170

   b.

   Bid = 180

   c.

   Bid = 200

   d.

   Bid = 220

   e.

   Bid = 230

   f.

   None of the above.

Question 11

1. Consider a sequential trade model in which a security has an uncertain value. The value V of the security can either be $170 or $250 with equal probability. The proportion of informed traders is 50%, whereas the proportion of liquidity traders is 50%. As usual, liquidity traders buy or sell with equalprobability, whereas informed traders only buy when they know the security price is high, and sell when they know the security price is low.

   The probability that V = $250, conditional that the first trade is a buy, is:

   a.

   P[V = 250 | Buy] = 0.25

   b.

   P[V = 250 | Buy] = 0.35

   c.

   P[V = 250 | Buy] = 0.50

   d.

   P[V = 250 | Buy] = 0.65

   e.

   P[V = 250 | Buy] = 0.75

   f.

   None of the above.

Question 12

1. Consider a sequential trade model in which a security has an uncertain value. The value V of the security can either be $170 or $250 with equal probability. The proportion of informed traders is 50%, whereas the proportion of liquidity traders is 50%. As usual, liquidity traders buy or sell with equalprobability, whereas informed traders only buy when they know the security price is high, and sell when they know the security price is low.

   The conditional expectation of V, conditional that the first trade is a sell, is:

   a.

   E[V | Sell] = 190

   b.

   E[V | Sell] = 180

   c.

   E[V | Sell] = 210

   d.

   E[V | Sell] = 220

   e.

   E[V | Sell] = 230

   f.

   None of the above.

Question 13

1. Consider a sequential trade model in which a security has an uncertain value. The value V of the security can either be $150 or $250 with equal probability. The proportion of informed traders is 40%, whereas the proportion of liquidity traders is 60%. As usual, liquidity traders buy or sell with equalprobability, whereas informed traders only buy when they know the security price is high, and sell when they know the security price is low.

   The probability that V = $250, conditional that the first trade is a sell, is:

   a.

   P[V = 250 | Sell] = 0.2

   b.

   P[V = 250 | Sell] = 0.3

   c.

   P[V = 250 | Sell] = 0.5

   d.

   P[V = 250 | Sell] = 0.7

   e.

   P[V = 250 | Sell] = 0.8

   f.

   None of the above.

Question 14

1. Consider a sequential trade model in which a security has an uncertain value. The value V of the security can either be $150 or $250 with equal probability. The proportion of informed traders is 40%, whereas the proportion of liquidity traders is 60%. As usual, liquidity traders buy or sell with equalprobability, whereas informed traders only buy when they know the security price is high, and sell when they know the security price is low.

   The conditional expectation of V, conditional that the first trade is a sell, is:

   a.

   E[V | Sell] = 170

   b.

   E[V | Sell] = 180

   c.

   E[V | Sell] = 200

   d.

   E[V | Sell] = 220

   e.

   E[V | Sell] = 230

   f.

   None of the above.

Question 15

1. Consider a sequential trade model in which a security has an uncertain value. The value V of the security can either be $150 or $250 with equal probability. The proportion of informed traders is 40%, whereas the proportion of liquidity traders is 60%. As usual, liquidity traders buy or sell with equalprobability, whereas informed traders only buy when they know the security price is high, and sell when they know the security price is low.

   The dealer will set his ask at:

   a.

   Ask = 170

   b.

   Ask = 180

   c.

   Ask = 200

   d.

   Ask = 220

   e.

   Ask = 230

   f.

   None of the above.

Question 16

1. In measuring the Implementation Shortfall (IS) we compare:

   a.

   The performance of an actual portfolio with the performance of an index.

   b.

   The performance of an actual portfolio with the performance of a hypothetical paper portfolio.

   c.

   The performance of an actual portfolio with the performance of a basket portfolio of similar securities.

   d.

   None of the above.

Question 17

1. If I buy or sell a $200 stock for which the total one-way trading cost is 50 basis points, then the trading cost per share will be:

   a.

   $0.05 per share.

   b.

   $0.50 per share.

   c.

   $1.00 per share.

   d.

   $1.50 per share.