Answer using (P_execution - P_decision )/ P_decision = Realized profit/loss
It’s not consistent with curriculum. Why?
Curriculum Example
On Monday, the shares of Impulse Robotics close at £10.00 per share.
On Tuesday, before trading begins, a portfolio manager decides to buy Impulse Robotics. An order goes to the trading desk to buy 1,000 shares of Impulse Robotics at £9.98 per share or better, good for one day. The benchmark price is Monday’s close at £10.00 per share. No part of the limit order is filled on Tuesday, and the order expires. The closing price on Tuesday rises to £10.05.
On Wednesday, the trading desk again tries to buy Impulse Robotics by entering a new limit order to buy 1,000 shares at £10.07 per share or better, good for one day. That day, 700 shares are bought at £10.07 per share. Commissions and fees for this trade are £14. Shares for Impulse Robotics close at £10.08 per share on Wednesday.
Realized profit/loss reflects the difference between the execution price and the relevant decision price (here, the closing price of the previous day). The calculation is based on the amount of the order actually filled:
The decision price must be 10 not 10.05 as you have calculated. The decision price is the price at where you had the decision. He decided in Tuesday before market open so the decision price is Monday close. Not Tuesday close .good luck
Schweser is clear that they consider the benchmark price to use for realized profit/loss if it extends beyond a day is the closing price on the prior day as June06 states. Either the answer is wrong or Schweser is wrong. Which one is it?
In the CFA text example, it appears as through two relevant decision prices exist : 10.05 and 10.00. While the 2014 exam has only 1 relevant decision price = 12.45
Imp shortfall always compares the actual portfolio to the paper portfolio, so that’s why the original $10.00 is used as denominator, while the more recent decision price of 10.05 is used in the numerator of realized profit/loss component. I think.
2014 AM Raffo is analyzing several equities to add to the portfolio. She finds a cement company, CTAC, that she believes is trading at an attractive valuation. In establishing the CTAC position, the sequence of events is as follows: On Monday, CTAC shares close at GBP 12.24. On Tuesday afternoon, Raffo directs Reynolds to buy 15,000 shares of CTAC. The decision price is GBP 12.45. He purchases 6,000 shares at GBP 12.51. Trading fees total an additional GBP 0.01 per share purchased. CTAC’s closing price on Tuesday is GBP 12.50. On Wednesday, Reynolds decides to cancel the buy order for the remaining 9,000 shares and records a cancellation price of GBP 12.90. D. Calculate the component of the implementation shortfall (in basis points) that is attributable to realized profit/loss. Show your calculations.
This equation is not the one used in IS (P_execution - P_decision )/ P_decision. For calculation of P/L in IS the denominator is not the same value as the decision price in the numerator. The denominator is the price of the day before the decision was taken. It’s the same d****d* denominator for all the calculations of the implicit cost in IS.
* the closer i get to the exam day, the more i’ll curse. After the exam, i’ll turn into the angel i always was.
The market price of the security when the order is initiated. Often orders are initiated when the market is closed and the previous trading day’s closing price is used as the DP.
If based on schweser, it’s easily get the wrong DP for 2014 AM.
Tuesday AFTERNOON makes the difference. So trading day had already started with a new decision price. In this case the decision price is the one they have indicated (12.45)
This is different than the assumption in the OP “On Tuesday, before trading begins”
So what’s the difference between decision price and prior day’s close? I guess if they don’t specify decision price, then use prior day’s close, but if they do specify, then use decision price. There’s been so many problems where they specify decision price and the denominator is STILL 1st day’s close because that’s what you’re usually basing it off of.