Question 2:

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) Explain why price impact 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.

b) Discuss whether the significance and direction of the relationships between bid-ask spread and share price, market capitalisation, return volatility and turnover are consistent with prior evidence, using at least two academic journal articles to support your argument.