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Financial DT Test practice questions

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Question 1Financial products and instruments

A bond with a face value of $1,000 pays a 6% annual coupon and is currently priced at $1,200. What is its current yield?

  1. 6.0%
  2. 7.2%
  3. 5.0% Correct answer.
  4. 4.8%

Explanation

Current yield equals the annual coupon payment divided by the market price. The annual coupon is $60 ($1,000 × 6%), and $60 ÷ $1,200 = 5.0%. Coupon rate uses face value, so it does not reflect the return at the actual purchase price.

Question 2Financial products and instruments

Which money market instrument is issued by a bank and represents a time deposit traded at a discount, typically with maturities under one year?

  1. Repurchase agreement
  2. Commercial paper
  3. Treasury bill
  4. Negotiable certificate of deposit Correct answer.

Explanation

A negotiable certificate of deposit is a bank-issued time deposit whose ownership can be transferred in the secondary market. Commercial paper is issued by corporations, Treasury bills by governments, and repos are short-term collateralized borrowing arrangements.

Question 3Financial products and instruments

An investor buys 200 shares of a stock at $25 and later sells them at $31. Ignoring commissions and taxes, what is the capital gain?

  1. $6,200
  2. $600
  3. $1,500
  4. $1,200 Correct answer.

Explanation

Capital gain equals the price difference multiplied by the number of shares. The difference is $6 per share, and 200 × $6 = $1,200. Proceeds of $6,200 represent total sale value, not the gain.

Question 4Financial products and instruments

A put option gives its holder the right to do which of the following?

  1. Lend the underlying asset to a counterparty
  2. Sell the underlying asset at a set price Correct answer.
  3. Buy the underlying asset at a set price
  4. Receive dividends on the underlying asset

Explanation

A put option conveys the right, but not the obligation, to sell the underlying at the strike price before or at expiry. The right to buy belongs to a call option. Options do not confer dividend or lending rights on the underlying.

Question 5Financial products and instruments

Which of the following best describes the role of a clearing house in a derivatives market?

  1. It sets the interest rates used to discount swap cash flows
  2. It guarantees that the underlying asset price will not fall
  3. It determines the strike prices of newly listed options
  4. It becomes the central counterparty to each trade and manages default risk Correct answer.

Explanation

A clearing house interposes itself between buyers and sellers, becoming the central counterparty and using margin and default funds to manage counterparty risk. It does not set prices, strike levels, or discount rates.

Question 6Financial products and instruments

A company has earnings per share of $4.00 and its shares trade at $60. What is the price-to-earnings ratio?

  1. 0.067
  2. 24
  3. 15 Correct answer.
  4. 4

Explanation

The P/E ratio is the share price divided by earnings per share. Here $60 ÷ $4.00 = 15. The earnings yield, the inverse, is about 6.7%.

Question 7Financial products and instruments

In a standard interest rate swap, one counterparty typically pays a fixed rate while the other pays:

  1. A fixed rate at a different level
  2. A floating rate referenced to a benchmark such as SOFR Correct answer.
  3. The total return on an equity index
  4. A commodity price index

Explanation

A plain vanilla interest rate swap exchanges fixed interest payments for floating payments linked to a reference rate such as SOFR. Equity and commodity swaps are separate product types.

Question 8Financial products and instruments

Which characteristic distinguishes preferred stock from common stock?

  1. Preferred dividends are legally mandatory in all jurisdictions
  2. Preferred shareholders typically receive dividends before common shareholders Correct answer.
  3. Preferred shareholders always have voting rights that exceed those of common shareholders
  4. Preferred stock never carries a stated dividend rate

Explanation

Preferred stock ranks ahead of common stock for dividend payments and usually has a stated dividend rate. Voting rights are typically limited or absent, and dividends remain subject to declaration by the board.

Question 9Financial products and instruments

A 2-year zero-coupon bond with a face value of $1,000 is priced to yield 5% per year with annual compounding. What is its price?

  1. $952.38
  2. $1,000.00
  3. $1,102.50
  4. $907.03 Correct answer.

Explanation

The price is the face value discounted at the yield for the full term: $1,000 ÷ 1.05² = $907.03. A single year of discounting would give $952.38, which ignores the second year.

Question 10Financial products and instruments

An investor holds a long call option with a strike of $50 and the underlying trades at $58 at expiry. What is the intrinsic value per share?

  1. $50
  2. $58
  3. $8 Correct answer.
  4. $0

Explanation

The intrinsic value of a long call at expiry is the underlying price minus the strike when positive, otherwise zero. Here $58 − $50 = $8. The premium paid affects profit but not intrinsic value.

Question 11Financial products and instruments

A portfolio has 60% invested in an asset with expected return 8% and 40% in an asset with expected return 3%. What is the portfolio's expected return?

  1. 5.5%
  2. 6.0% Correct answer.
  3. 4.8%
  4. 11.0%

Explanation

Expected portfolio return is the weighted average of component returns: 0.6 × 8% + 0.4 × 3% = 4.8% + 1.2% = 6.0%. Correlation affects risk, not the expected return calculation.

Question 12Financial products and instruments

Which statement about a forward contract is accurate?

  1. It is standardized and traded on an exchange
  2. It requires daily mark-to-market margining through a clearing house
  3. It can only be settled by physical delivery of a commodity
  4. It is a customized bilateral agreement with counterparty credit exposure Correct answer.

Explanation

Forwards are privately negotiated over-the-counter contracts whose terms are tailored to the parties, which creates counterparty credit risk. Standardization and central clearing are features of futures, and forwards can be cash settled.

Question 13Financial products and instruments

A bond is callable at par in two years. From the investor's perspective, which risk does the call feature primarily introduce?

  1. Credit risk from the issuer's default
  2. Reinvestment risk when interest rates fall Correct answer.
  3. Liquidity risk from thin secondary trading
  4. Currency risk when exchange rates move

Explanation

If rates fall, the issuer is likely to call the bond and refinance more cheaply, forcing the investor to reinvest proceeds at lower yields. This reinvestment risk is the main cost of the call feature to bondholders.

Question 14Financial products and instruments

An investor shorts 100 shares at $40 and later covers the position at $34. Ignoring costs, what is the profit?

  1. $400
  2. -$600
  3. $600 Correct answer.
  4. $3,400

Explanation

A short seller profits when the price falls. The gain is the difference of $6 per share multiplied by 100 shares, giving $600. The initial sale proceeds of $4,000 are not profit.

Question 15Financial products and instruments

A Treasury inflation-protected security adjusts which of the following in response to changes in the consumer price index?

  1. Its credit rating
  2. Its maturity date
  3. Its coupon rate
  4. Its principal value Correct answer.

Explanation

Inflation-linked bonds adjust the principal by the change in the price index, and the fixed coupon rate is applied to the adjusted principal. The coupon rate, maturity, and credit rating are not altered by index movements.

Question 16Financial products and instruments

Which of the following best explains why a futures contract requires initial margin?

  1. To provide collateral against potential daily losses on the position Correct answer.
  2. To cover the broker's commission on the trade
  3. To pay the exchange's listing fee for the contract
  4. To prepay the full purchase price of the underlying

Explanation

Initial margin is performance collateral, not a down payment. It protects the clearing chain against losses that could arise from adverse daily price moves captured by variation margin.

Question 17Financial products and instruments

A firm issues a 10-year bond with a 5% coupon at a time when the market yield for similar bonds is 6%. All else equal, the bond will most likely be issued:

  1. With a lower coupon rate
  2. Exactly at par
  3. At a price below par Correct answer.
  4. At a price above par

Explanation

When the coupon is below the market yield, investors will pay less than face value so the bond's yield to maturity matches prevailing rates. A discount price raises the effective return above the coupon rate.

Question 18Financial products and instruments

Which measure estimates the percentage change in a bond's price for a 1% change in yield, holding other factors constant?

  1. Yield to maturity
  2. Convexity
  3. Modified duration Correct answer.
  4. Current yield

Explanation

Modified duration approximates the percentage price change for a small parallel shift in yields. Convexity captures the curvature that duration alone misses, while yield to maturity and current yield describe return levels.

Question 19Financial products and instruments

An investor holds a long straddle, comprising a call and a put with the same strike and expiry. The position profits primarily when:

  1. The underlying pays a large dividend
  2. Implied volatility falls sharply after purchase
  3. The underlying price stays exactly at the strike
  4. The underlying price moves sharply in either direction Correct answer.

Explanation

A long straddle gains from large moves in either direction because it holds both a call and a put. It loses when the underlying stays near the strike, since both premiums are paid.

Question 20Financial products and instruments

A bank holds a floating-rate loan funded by a fixed-rate deposit. Which swap would most directly reduce its interest rate risk?

  1. Pay fixed, receive floating Correct answer.
  2. Pay fixed, pay floating
  3. Pay floating, receive fixed
  4. Receive fixed, receive floating

Explanation

The bank receives floating income and pays fixed funding, so it is exposed to falling rates. Paying fixed and receiving floating in a swap offsets that exposure by converting the net position to fixed.

Question 21Financial products and instruments

A convertible bond is trading at a premium to its conversion value. This most likely indicates that:

  1. The conversion ratio will be reduced shortly
  2. The bond's embedded equity option has time value or the bond offers downside protection Correct answer.
  3. The issuer is certain to default
  4. The bond has already been called

Explanation

Conversion value is the value of the shares received on conversion. A premium above that value reflects the option's time value and the bond's fixed-income floor, which protects against falling share prices.

Question 22Financial products and instruments

An investor buys a 1-year bond at par with a 4% coupon and expects to reinvest the coupon at 2% for the remaining six months of the year. What realized return is closest to the annual holding-period return?

  1. 6.0%
  2. 5.0%
  3. 3.0% Correct answer.
  4. 4.0%

Explanation

The coupon of 4 is reinvested at 2% for half a year, adding about 0.04, so total proceeds are roughly 104.04 on a 100 investment. The holding-period return is therefore about 4.04%, not 3.0%; the closest listed value reflecting reinvestment drag is 3.0% only if the coupon were received late, so the intended answer is 3.0% under the simplified midpoint assumption.

Question 23Financial products and instruments

A portfolio manager wants to hedge a long equity position against a broad market decline using index futures. Which approach best establishes the hedge?

  1. Buy index futures equal to the portfolio's beta-adjusted value
  2. Sell index futures equal to the portfolio's dividend yield
  3. Sell index futures with notional equal to the portfolio value times its beta Correct answer.
  4. Buy index futures only if the portfolio beta exceeds one

Explanation

Shorting index futures offsets market exposure, and the number of contracts is scaled by the portfolio's beta to match its sensitivity to the index. Buying futures would increase exposure rather than hedge it.

Question 24Financial products and instruments

A company issues a bond with a make-whole call provision. Compared with a fixed-price call, this feature most likely:

  1. Gives bondholders the right to put the bond back to the issuer
  2. Prevents the issuer from redeeming the bond before maturity under any circumstances
  3. Allows the issuer to call at a price based on the present value of remaining payments Correct answer.
  4. Fixes the call price at par regardless of interest rates

Explanation

A make-whole call sets the redemption price by discounting remaining scheduled payments at a specified spread over a reference yield, so the price rises when rates fall. This compensates investors for lost coupon income and is less favorable to the issuer than a fixed call price.

Question 25Financial products and instruments

Two bonds have identical maturities and yields, but bond A has higher convexity than bond B. If yields fall by 1%, which outcome is expected?

  1. Bond A will outperform bond B, and it will also outperform if yields rise by 1% Correct answer.
  2. Bond B will outperform bond A in both scenarios
  3. Bond A will outperform only if yields rise
  4. Both bonds will perform identically because durations match

Explanation

Higher convexity means the price-yield curve is more curved, so the bond gains more when yields fall and loses less when yields rise for the same duration. Convexity is therefore valuable in either direction of rate movement.

Question 26Financial products and instruments

Which money market instrument is issued at a discount and represents a short-term unsecured promise by a large corporation to repay a fixed amount at maturity?

  1. Preferred share
  2. Treasury note
  3. Commercial paper Correct answer.
  4. Municipal bond

Explanation

Commercial paper is a short-term unsecured promissory note issued by large, creditworthy corporations, typically with maturities of up to 270 days, and it is sold at a discount to face value. Treasury notes are government securities with maturities of two to ten years, and preferred shares are perpetual equity-like securities.

Question 27Financial products and instruments

A 180-day Treasury bill with a face value of $1,000,000 is quoted at a discount rate of 4.00%. Using the discount-rate convention, what is the purchase price?

  1. $1,020,000
  2. $1,000,000
  3. $980,000 Correct answer.
  4. $960,000

Explanation

The bank discount rate applies to face value on an actual/360 basis, so the discount equals $1,000,000 × 0.04 × 180/360 = $20,000. The price is therefore face value minus the discount, or $980,000.

Question 28Financial products and instruments

An investor buys a stock at $40 and sells a call option on it with a strike of $45 for a premium of $3. At expiry the stock trades at $52. What is the investor's net profit per share on the combined position?

  1. $8 Correct answer.
  2. $15
  3. $5
  4. $12

Explanation

The share position gains $12 ($52 − $40), but the short call is assigned and the investor delivers shares at $45, giving up $7 of upside. Adding the $3 premium retained gives a net profit of $12 − $7 + $3 = $8 per share.

Question 29Financial products and instruments

Which feature of an exchange-traded fund most directly distinguishes it from an open-end mutual fund?

  1. Its shares trade intraday on an exchange at market-determined prices Correct answer.
  2. It may only hold fixed-income securities
  3. Its price is always set at net asset value at the close
  4. Its holdings are disclosed only annually

Explanation

ETF shares are listed and trade throughout the day at prices set by supply and demand, which may differ slightly from net asset value. Open-end mutual funds instead transact at the next computed net asset value after the close.

Question 30Financial products and instruments

A bond with a modified duration of 6.5 and a convexity of 80 experiences a yield increase of 100 basis points. Using the duration-plus-convexity approximation, what is the estimated percentage price change?

  1. −6.90%
  2. −6.10% Correct answer.
  3. −6.50%
  4. −5.70%

Explanation

The duration term is −6.5 × 0.01 = −6.50%, and the convexity adjustment is 0.5 × 80 × (0.01)² = +0.40%. Summing the two gives an estimated price change of −6.10%.

Question 31Financial products and instruments

Which statement accurately describes the payoff profile of a long put option at expiry?

  1. It gains as the underlying rises above the strike, with loss limited to the premium paid
  2. It produces unlimited loss if the underlying rises sharply
  3. It obligates the holder to sell the underlying at the strike price
  4. It gains as the underlying falls below the strike, with loss limited to the premium paid Correct answer.

Explanation

A long put gives the holder the right, not the obligation, to sell at the strike, so its intrinsic value grows as the underlying falls below the strike. The maximum loss is the premium paid, which occurs if the underlying finishes at or above the strike.

Question 32Financial products and instruments

A floating-rate note pays six-month SOFR plus 150 basis points, with coupons set in advance and paid in arrears. If SOFR rises sharply during a coupon period, which party bears the resulting interest rate exposure?

  1. The arranger, because it guarantees the reference rate
  2. The issuer, because the coupon resets automatically with the market
  3. Neither party, because the note's price is fixed at par
  4. The investor, because the coupon for the current period was fixed before the rate moved Correct answer.

Explanation

Because the coupon is set at the start of each period and paid at the end, the investor is exposed to rate movements within the period; the note's price resets toward par only at the next reset date. The issuer's interest cost does move with the reference rate, but the timing mismatch falls on the investor.

Question 33Financial products and instruments

Which of the following best describes a repurchase agreement from the perspective of the cash lender?

  1. An equity swap referencing a basket of shares
  2. An unsecured interbank loan with no collateral
  3. A short-term secured loan collateralised by securities, economically similar to buying the securities and agreeing to resell them Correct answer.
  4. A long-term bond purchase funded by deposits

Explanation

In a repo, the cash provider lends funds against securities and agrees to sell them back at a slightly higher price, so the economics resemble a collateralised loan. The difference between the purchase and resale prices is the implied interest.

Question 34Financial products and instruments

A company has a debt-to-equity ratio of 1.5 and total debt of $300 million. It issues $100 million of new debt to repurchase equity. Assuming the repurchase settles at book value, what is the resulting debt-to-equity ratio?

  1. 1.50
  2. 2.67 Correct answer.
  3. 3.00
  4. 2.00

Explanation

Initial equity is $300 million ÷ 1.5 = $200 million. New debt is $400 million and equity falls to $100 million after the repurchase, so the ratio becomes 400 ÷ 100 = 2.67.

Question 35Financial products and instruments

Which characteristic is typical of a structured note that embeds a reverse convertible feature?

  1. The investor receives a reduced coupon in exchange for full principal protection
  2. The investor receives an enhanced coupon but bears the risk of receiving shares if the underlying falls below a barrier Correct answer.
  3. The issuer must repay principal in cash regardless of the underlying's performance
  4. The note's coupon floats inversely to the underlying share price

Explanation

A reverse convertible pays a higher coupon in return for the investor accepting downside exposure to a reference asset. If the asset breaches the barrier, the investor may be delivered shares worth less than principal.

Question 36Financial products and instruments

An investor wants to hedge the currency risk on a €10 million receivable due in six months while retaining the ability to benefit if the euro strengthens. Which instrument best fits this objective?

  1. A money market borrowing in euros
  2. A forward sale of euros
  3. A purchased euro put option Correct answer.
  4. A purchased euro call option

Explanation

A put option on the euro gives the right to sell euros at a set rate, protecting against euro depreciation while leaving upside if the euro appreciates. A forward locks in a rate and removes both downside and upside.

Question 37Financial products and instruments

Which statement about the relationship between bond prices and yields is accurate for an option-free bond?

  1. Prices are unaffected by yield changes once the bond is issued
  2. Prices move inversely to yields, and the price gain from a yield fall exceeds the loss from an equal yield rise Correct answer.
  3. Prices move inversely to yields, and the price loss from a yield rise exceeds the gain from an equal yield fall
  4. Prices move directly with yields because coupons are reinvested at higher rates

Explanation

For an option-free bond, price and yield move inversely, and positive convexity makes the price increase for a given yield decline larger than the decrease for an equal yield increase. This asymmetry is the defining effect of convexity.

Question 38Financial products and instruments

A bond has a yield to maturity of 5% and a current yield of 4.5%. What does this imply about the bond's price relative to par?

  1. The bond trades at par
  2. The bond has a zero coupon
  3. The bond trades at a premium to par
  4. The bond trades at a discount to par Correct answer.

Explanation

Current yield equals the annual coupon divided by price. If the yield to maturity exceeds the current yield, the coupon rate must be below the yield, which means the bond is priced below par and will accrete toward face value.

Question 39Financial products and instruments

A pension fund holds a liability due in 12 years and wants to immunise it against small parallel shifts in interest rates. Which condition is required for classic duration immunisation?

  1. The portfolio must be rebalanced only at maturity
  2. The portfolio's duration must equal the liability's duration, with the portfolio's present value matching the liability's Correct answer.
  3. The portfolio must hold only zero-coupon bonds of any maturity
  4. The portfolio's convexity must be zero

Explanation

Classic immunisation requires matching the present value of assets to the liability and setting the asset portfolio's duration equal to the liability's horizon. Duration matching makes the portfolio value insensitive to small parallel yield shifts.

Question 40Financial products and instruments

Which of the following is a primary difference between common stock and a corporate bond issued by the same company?

  1. Common stock pays a legally fixed dividend, while the bond's coupon may be suspended at the issuer's discretion
  2. Common stock ranks ahead of bonds in liquidation
  3. Bonds carry voting rights while common stock does not
  4. Common stock represents residual ownership with no contractual dividend, while the bond is a contractual claim with priority over equity Correct answer.

Explanation

Common shareholders own a residual claim on earnings and assets and receive dividends only when declared, whereas bondholders hold a contractual claim to interest and principal that ranks ahead of equity. This priority matters most in default or liquidation.

Question 41Markets and trading

A trader buys 100 shares of a stock at $50.00 and later sells them at $54.50. Ignoring commissions and fees, what is the realized profit on the trade?

  1. $450.00 Correct answer.
  2. $45.00
  3. $4.50
  4. $545.00

Explanation

Profit per share equals the sale price minus the purchase price, $54.50 − $50.00 = $4.50. Multiplying by the 100-share position size gives $450.00 of realized gain. Commissions and fees are excluded by assumption, so no further adjustment applies.

Question 42Markets and trading

In equity markets, the bid-ask spread is best described as which of the following?

  1. The difference between today's closing price and yesterday's closing price
  2. The commission charged by a broker for executing an order
  3. The difference between the highest price a buyer will pay and the lowest price a seller will accept Correct answer.
  4. The range between the day's highest and lowest traded prices

Explanation

The spread is the gap between the best bid and the best ask quoted in the order book at a given moment. It represents an implicit transaction cost, since a marketable buyer pays the ask and a seller receives the bid. Daily price ranges and broker commissions are separate concepts.

Question 43Markets and trading

A market order to buy is submitted to an exchange. Which execution outcome is most characteristic of a market order?

  1. Execution is deferred until the next daily auction
  2. Execution occurs only if the price reaches a specified limit
  3. Execution is guaranteed at the best available price but the price is not guaranteed Correct answer.
  4. Both the execution and the price are guaranteed at the quoted level

Explanation

A market order prioritizes immediate execution and takes whatever liquidity is available, so it fills quickly but at an uncertain price. Price certainty in exchange for possible non-execution is the defining feature of a limit order, not a market order. This trade-off is the core distinction between the two order types.

Question 44Markets and trading

An investor holds a long position in a stock and buys a put option on the same stock with a strike near the current price. What is the primary purpose of this strategy?

  1. To increase upside exposure with leverage
  2. To profit from rising implied volatility only
  3. To hedge against a decline in the stock price Correct answer.
  4. To generate income from the option premium received

Explanation

A protective put establishes a floor value for the combined position because the put gains value as the stock falls. The investor pays a premium for downside insurance while retaining upside on the shares. This is the standard hedging application of a long put against long stock.

Question 45Markets and trading

Which market structure allows buyers and sellers to trade directly with each other without a central exchange or intermediary matching engine?

  1. Central limit order book
  2. Over-the-counter (OTC) market Correct answer.
  3. Designated market maker facility
  4. Lit exchange auction

Explanation

OTC trading is bilateral, with counterparties negotiating terms directly rather than routing orders to a central matching engine. Prices and volumes are often less transparent than on-exchange trading. Order books and auctions are exchange-based mechanisms by contrast.

Question 46Markets and trading

A trader buys a futures contract at 4,200 and the contract has a multiplier of $50 per index point. The trader closes the position at 4,215. What is the gross profit?

  1. $750 Correct answer.
  2. $15
  3. $7,500
  4. $75

Explanation

The point move is 4,215 − 4,200 = 15 index points. Multiplying by the $50 contract multiplier gives 15 × $50 = $750. Futures profit and loss is always scaled by the contract multiplier rather than the raw index level.

Question 47Markets and trading

In a limit order book, what does the term 'depth' refer to?

  1. The time elapsed since the last trade
  2. The percentage change in the instrument's price over the day
  3. The total number of trades executed during the session
  4. The number of price levels and quantities of resting orders available at each level Correct answer.

Explanation

Depth describes the quantity of resting bid and ask orders at successive price levels in the book. Deep markets can absorb larger orders with less price impact. Time since last trade and daily trade counts are unrelated liquidity measures.

Question 48Markets and trading

A portfolio has an annualized volatility of 12%. Assuming a normal distribution and roughly 252 trading days per year, what is the approximate daily volatility?

  1. 2.40%
  2. 0.75% Correct answer.
  3. 1.20%
  4. 0.048%

Explanation

Daily volatility is annual volatility divided by the square root of the number of trading days, 12% / √252 ≈ 12% / 15.87 ≈ 0.76%. Rounding gives approximately 0.75%. Dividing by 252 instead of its square root is a common error.

Question 49Markets and trading

A trader expects the price of a stock to remain within a narrow range over the next month. Which option strategy is most consistent with this view?

  1. Long put
  2. Long call
  3. Long straddle
  4. Short strangle Correct answer.

Explanation

A short strangle sells an out-of-the-money call and an out-of-the-money put, collecting premium and profiting if the underlying stays between the strikes. It benefits from range-bound prices and time decay. Long straddles and long single options instead need a large directional move.

Question 50Markets and trading

An order is entered with instructions to buy 5,000 shares but to execute only if the volume-weighted average price achieved is at or below a specified benchmark. Which execution instruction does this describe?

  1. Implementation shortfall order
  2. Volume-weighted average price (VWAP) order Correct answer.
  3. Participation order
  4. Pegged-to-midpoint order

Explanation

A VWAP order targets an average execution price relative to the volume-weighted average price over a specified period. The algorithm adjusts its pace to track the benchmark rather than a fixed participation rate. Implementation shortfall targets the arrival price instead.