In a report dated December 15, 2004, the Office of Economic Analysis of the U.S. Securities and Exchange Commission (SEC) compared trade execution quality on the NYSE and NASDAQ using a matched sample of 113 pairs of firms. The comparison is based on six months of data from January to June 2004. The results regarding which market has the better execution quality (NYSE or NASDAQ) vary across order size, firm size, and order type. The results below are for small market orders (100–499 shares) in shares of large market capitalization firms.

Spread (cents)	NASDAQ	NYSE
Quoted spread	2.737	2.791
Effective spread	2.650	2.490

On the basis of the above results, address the following:

Determine whether dealers in NASDAQ shares and dealers (‘‘specialists’’) in NYSE shares in the particular market being discussed provided price improvements.

B. Contrast the relative performance of dealers in the two markets with regard to any price improvements.

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Q.2. Consider some stocks that trade in two markets, with a trader being able to trade in these stocks in either market. Suppose that the two markets are identical in all respects except that bid–ask spreads are lower and depths (the number of shares being offered at the bid and ask prices) are greater in one of the two markets. State in which market liquidity-motivated and information-motivated traders would prefer to transact. Justify your answer.

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Q.3. Evaluate the most likely effects of the following events on the investor’s investment objectives, constraints, and financial plan.

A childless working married couple in their late 20s adopts an infant for whom they hope to provide a college education.

An individual decides to buy a house in one year. He estimates that he will need $102,000 at that time for the down payment and closing costs on the house. The portfolio from which those costs will be paid has a current value of $100,000 and no additions to it are anticipated.

A foundation with a €150,000,000 portfolio invested 60 percent in equities, 25 percent in long-term bonds, and 15 percent in absolute return strategies has approved a grant totaling €15,000,000 for the construction of a radio telescope observatory. The foundation anticipates a new contribution from a director in the amount of €1,000,000 toward the funding of the grant.

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Duane Rogers, as chief investment officer (CIO) for the Summit PLC defined-benefit pension scheme, has developed an economic forecast for presentation to the plan’s board of trustees. Rogers projects that U.K. inflation will be substantially higher over the next three years than the board’s current forecast.

Rogers recommends that the board immediately take the following actions based on his forecast:

Revise the pension scheme’s investment policy statement to account for a change in the U.K. inflation forecast.

Reallocate pension assets from domestic (U.K.) to international equities because he also expects inflation in the U.K. to be higher than in other countries.

Initiate a program to protect the pension scheme’s financial strength from the effects of U.K. inflation by indexing benefits paid by the scheme.