a quick question about fees in IS calculation.
My understanding that there are two ways to calculate IS, one is paper return - actual return vs execution cost + opp cost + fees.
In term of paper - actual return formula, why fee cost doesn’t play as a part of equation?
Real portfolios have fees.
Pretend (i.e., paper) portfolios do not.
Actual return part includes the fees. Paper return is just academic calculation of what would have been earned in perfect world with total execution and no fees. Actual return is what exactly hit your bank account after doing the trade (fees, partial execution failure, anything else).
On paper you should have made a million dollars just based on price movement and your investment idea being correct about the movement. This was what was in your original head when you did the trade. But in actuality you only made 200k due to the stock being illiquid, or large fees, or the price being volatile over your execution period if multiple trade blocks, etc etc. Your IS is 800k in such case. Dream - reality = IS.