On p. 220 of book 4 in schweser it says that delay/slippage costs is the difference between the closing price on the day the order was not filled and the previous day’s closing price. Yet, in the example on p.221 they use the difference between the benchmark and the previous day close. Will the benchmark price be given on the exam or do we just assume that it’s the opening price?
I saw that in one of the end of chapter problems too. My rule will be use prev day close unless they give the benchmark.
I would say the example is correct because the total of explicit and implict costs is the same as the result from difference calculation between paper portfolio and real portfolio. I had thought that I am clear on this calculation in Schweser book, but I am confused by the explanation for question 11 in the 2006 exam.
it should be the benchmark price. Delay is difference between when you make the decision to the previous day close. The realized profit/loss if the difference between the previous day close and execution price.
benchmark price = price when decision to buy is made the delay/benchmark price + realized profit-or-loss/benchmark price = execution price/benchmark price delay = previous day close - benchmark (previous day close here means close price on the day prior the order being executed) realized profit/loss = execution price - previous day close delay + realized profit/loss = (previous day close - benchmark) + (execution price - previous day close) = execution price - benchmark Lets look at example: Day 0 (today): decision is made to buy 1,000 shares at $50.00, close price on day 0 is $50.10, no shares were purchased Day 1: no shares were purchased, close price is $50.20 Day 2: 300 shares gets filled at $50.25, stock closes at $50.30 Day 3: remainder 700 shares are purchased at $50.50 both delay and realized profit/loss will have two components, since shares were purchased on different days and at different prices delay (for first batch) = $50.20 - $50.00 (as formula above says it is previous day close - original decision price, and previous day close here is close on day 1, since the first batch was executed on day 2) delay (second batch) = $50.30 - $50.00 realized profit/loss (first batch) = $50.25 - $50.20 (here we have execution price - previous day close, again previous day close is closed on day 1, since the first batch was executed on day 2) realized profit/loss (second batch) = $50.50 - $50.30 So for instance, if you combine delay and realized profit/loss (for the first batch), you have: ($50.20 - $50.00) + ($50.25 - $50.20) = $50.25 - $50.00 (which is execution price for the first batch - original decision price) You’ll be also dividing each component by original decision price to convert all cost in percentages and multiply it by the ratio for each respectful batch of #of shares filled/originally decided lot size if we add all of that together we have {[($50.20 - $50.00) / $50.00] * (300/1000)} + {[($50.30 - $50.00) / $50.00] * (300/1000)} + {[($50.25 - $50.20) / $50.00] * (700/1000)} + {[($50.50 - $50.30)/ $50.00] * (700/10000} I left out missed opportunity cost component here, since I assumed entire order eventually got filled, otherwise for missed opportunity cost, it would be: missed opportunity = {[(final price - original benchmark) / original benchmark] * (# of shares not filled/original lot size)} the company will usually have a rule of how missed opportunity cost is calculated in terms of what final price to use, for instance it can be a price 5 days after the order is canceled
Did anyone try problem 10.B from reading 41. Implementation shortfall estimate is being calculated as: (Benchmark price - execution price) x quantity traded benchmark price is the midquote at the time the decision was made to trade. Can anyone tie-in the two concepts together? the one above and this one.
CFAI uses this in their problems, is this accurate? Estimated Implementation Shortfall = # of shares X (Mid - Excuted Price)
grexan, just read yours…
my question is on the exam, are we supposed to use this problem 10.b approach or the long detailed calculation as shown by volkovv This will probably be on the exam–
>re we supposed to use this problem 10.b approach or the long detailed calculation as shown by volkovv It depends on whether they ask us to break down implementation shortfall into components. If not, you can use the simplified formula from 10b (although it appears to me that it only works when all of your shares were traded, i.e. it does not account for missed trade opportunity cost). To be on the safe side I would calculate implementation shortfall = paper portfolio gain (assuming all shares were traded at bm price) - real portfolio gain (taking into account real number of shares traded at real execution prices plus commissions, etc).