Why is commission calculated with the paper portfolio investment?
TYIA
Commission is calculated with assumption that the entire block will be sold - that is the way of the process. I think it is assuming an averaging across the entire block, and given that it is a tip of the iceberg in terms of costs - it would not cause too many issues.
thank you cpk123
To overcome possible gaming virtue of VWAP, you use Implementation shortfall.
Implementation shortfall - difference in return between the paper portfolio - Actual return
Paper portfolio is established assuming the entire block is sold & at the decision price (prevaling price when the decision of investment was made)
So commissions - most visible part are calculated assuming the cost incurred if entire block would be sold. So commision is divided by paper portfolio amount.
And thank you frankz888 for raising the q.
It can be a huge time saver in the heat of the exam if you have a solid reasoning for each calculation piece , deliberately and intentionally. I’m the type that could do a thousand problems before the exam without thinking and then waste a lot of time thinking of trivia like this during the exam .
to confirm and as a ready reckoner.
Explicit - full size of order
Implicit costs
realized gain/loss -> on the portion bought / sold (actual portfolio)
delay costs -> on the portion bought/sold (paper portfolio)
missed trade opportunity costs (as the name implies) -> on the portion NOT bought/sold = Order Size - Portion Bought / Sold.