Financial Market Microstructure Page 3 of 5 January 2022 Question 2 - OPTIONAL 2. (6) 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 (2 marks) (2 marks) (2 marks) (2 marks) (2 marks) 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, - s;) = r + [E(Rm - Sm) - r where R, and R. are the assets and market's gross return (respectively). 8, and sm are the related percentage spreads and ris a riskless rate of return. i. Using suitable workings, show that the Acharya and Pedersen (2005) extension of the CAPM is expressed as: (4 marks) E(R) - r = B1jAm +E(s) + B2, Ba; Am Bag Am where Im is the market risk premium ii. Given the adjusted CAPM above, discuss the implications of the decomposition on asset pricing (6 marks) Total for Question 2: 20 marks Financial Market Microstructure Page 3 of 5 January 2022 Question 2 - OPTIONAL 2. (6) 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 (2 marks) (2 marks) (2 marks) (2 marks) (2 marks) 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, - s;) = r + [E(Rm - Sm) - r where R, and R. are the assets and market's gross return (respectively). 8, and sm are the related percentage spreads and ris a riskless rate of return. i. Using suitable workings, show that the Acharya and Pedersen (2005) extension of the CAPM is expressed as: (4 marks) E(R) - r = B1jAm +E(s) + B2, Ba; Am Bag Am where Im is the market risk premium ii. Given the adjusted CAPM above, discuss the implications of the decomposition on asset pricing (6 marks) Total for Question 2: 20 marks
