Implementation Shortfall Realized P&L Decision Price vs. Previous Close Price

Hi All,

CFA seems to be a little vague about when to use the decision price vs. the prior day’s price in calculating implementation shortfall.

Reference Reading 29 EOC question 11. For the trades calculated on Monday, on previous day closing price is given and the problem is solved using the decision price of $10 in the numerator. For the trades calculated on Tuesday the realized P&L is calculated using the previous day’s price in the numerator.

Is there a specific way to know which method to use for problems on the exam?

Wish CFAI would aim to reduce ambiguity like this in the text.


DP is the price of the stock at the time you “decide” to make trades.

Lot of times you "decide to make trades before the market is actually open so technically the DP is closing of last day. But if you decide to at 12 PM then you’ll use the market opening price that morning.

When you calculate the other components like miss opportunity you’ll need to use the closing day price of previous days as your BP. Assuming you have multi days of unfilled trades, then you need to keep readjusting your BP to calculate the missed opportunity component.

  • 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.

This question is from the CFA 2014 AM exam. Under this for the calculation of the realized profit/loss the formula is No. of shares filled* (execution price-previous days closing)/decision price*no of shares ordered. they have used 12.45 ie the decision price in the numerator instead of the previous days closing price. Is this what you are referring to if the order is decided to be filled at 12 PM?what if there was no decision price of 12.45? in that case we would have used 12.24 as DP and previous days close?

Yes this is actually the question. There does not seem to be a set method and CFAI seems to switch back and forth between a decision price and previous day’s close.