2014 AM Exam, Q10D (Trading, Monitoring, and Rebalancing)

Q10D of the 2014 AM Exam asks to calculate the component of the implementation shortfall (in bps) that is attributable to realized profit/loss.

The institute book instructs that to calculate the realized profit/loss component, the formula would be:

[(EP - DP)/BP] * (purchased shares/total shares)

However, the solutions to the 2014 AM Exam indicate that the formula to calculate the realized profit/loss component is:

[(EP - DP)/DP] * (purchased shares/total shares)

Any explanation for this discrepancy? Thanks!

That`s because you decided to enter the trade on Tuesday (not on Monday) when the price was 12.45. This price should be used as the benchmark price here.

  • when not stated otherwise, it seems we need to take the decision price as the benchmark price.