Got lost in IS again…
The answer does not use absolute value to calculate the delay cost so the delay cost is negative amount. While in Kaplan book example, every cost component of IS is calculated with absolute value. How do we know when to use absolute value?
Don’t use the absolute value.
Kaplan is a bit inconsistent because in Secret Sauce it does not use absolute value as in the Notes than uses bps of DP or value of paper portfolio total value.
In CFAI practicing material, it is always required to calculate in bps.
Whats the difference between using absolute and calculating the IS is percentage terms at the.end versus doing it the CFAI way and summing the individual percentages?
Does it mean the way Kaplan calculates is wrong?
I can see that the when we don’t use absolute value, the number could be either positive or negative.
Yes that’s correct dududu100. Here is a quick example, lets say you want to buy 100 shares of ABC Corp at $10 each. Due to a delay in execution, you managed to get the shares for $9.98. Surely that’s a good thing, the unintended delay allowed you to purchase the shares for a cheaper price than you had originally planned for/anticipated. This would be a “negative shortfall”, i.e. a positive result for your trade.
How about if you wanted to buy all the shares but you didn’t manage to get all 100 shares filled, instead your order was only half filled and you got 50 shares at $10. Now assume a few days down the road the share price falls to $9/share. Guess what, that missed fill was a fortunate event! Because you’ve now only lost $1/share on 50 shares instead of on a 100 shares. So that would also be a “negative shortfall” once again.
I hope that this starts to make sense for you on a more intuitive level. I feel people get too bogged down in formulas and forget to rationalize things. Obviously practice makes perfect with this, I still screw up a component of the calculation here and there, haha.
Thanks for the detailed response! This totally makes sense now. Have looked at Kaplan example so many times now it is time to forget.
My pleasure dududu100, glad I can help!