# Implementation shortfall

This is freaking me out: I just reviewed this session and was doing the CFAI end of the chapter problems. I thought I had a good handle on the calculations. I hit problem # 5 -Reading 41 and saw in the answer a different calculation of missed opportunity cost compared to Schwesers. !!! Can anybody clarify this for me ?

that one threw me for a loop as well - it is just a derivation of the Missed Trade Calculation but I dont believe in the question they asked for Dollar costs… (they remove the denominators on both the # of shares of the total block as well as the benchmark price. I don t even think it was covered in the reading (I couldnt find it).

If suppose it’s on the exam, which one should we use ? One with the denominator of paper portfolio or this ?

on the exam flip a coin…oh wait, i can’t bring coins to the exam right?

derswap - not sure - thats what got me about that question. Its another example of either an errata of CFAI making shiznit up as they go.

Got news for you. Was doing Stalla Exam 3 today. In the problem, they asked for dollar cost of the Implementation Shortfall on a per share basis. Yes, they did drop the denominators, but the Opportunity Cost was the only one where you had to multiply by the unfilled/total ratio.

^what’s with that. I did notice today or yesterday that in the readings for Stalla, the Opportunity cost is the only when that is describe as being mutiplied by the ratio the rest dont mention it in th text (Yes they show it in the formulas but not in the prose). But at the same time doing their problems yesterday I dont recall having to do this when they wnated \$ amounts vs %s. I’ll have to check again

I know I was like WTF, I think I’ve done these calculations about 4 times over the last 2 mo’s. Never seen it before. I think I even recall doing \$/share in the CFAI readings and don’t recall multiply by a ratio. And if this is the case, then why not multipling Delayed and Market Impact by fill/total ratio. Get back to me on this one willy!

^It is this way in either the 2006 or 2005 exam I think… They trick you at the end this is probably where Stalla took the problem from.

So this is correct then, you must multiply by the unfilled ratio only for Opportunity Cost then?

i guess so…

Yeah I just did that problem from the 2006 exam (number 10 i think). That’s where they’re getting it from.

I found it-it’s q 11- but it has no paper portfolio in the calculation !!

yes, to do it properly you have to multiply missed opportunite cost by unfiled/total ratio and you have to multiply both delayed costs and realized profit/loss by filed/total ratio ofcourse, you need to read carefully to see what the problem is aking you to do

^Not true Volkovv. Refer to Q11 2006 Exam.

I haven’t done it yet, will take a look when I get home. All I am saying that is a complete formula when you incorporate the ratio’s, and that is how its done in CFAI examples and sample problems. But maybe question in 2006 exam was asking for something else.

GUYS GUYS GUYS You have to think LOGICALLY about short fall. Shortfall is very simple. It is the difference between Paper portfolio (which is a portfolio that is formed when you DECIDE to execute transaction) and actual portfolko when you think your transaction is complete (might or might not be fully filled)

Volkovv and CSK, We all know that. Take a look at this problem and then we can discuss. It’s done differently.

derswap07 Wrote: ------------------------------------------------------- > Volkovv and CSK, > > We all know that. Take a look at this problem and > then we can discuss. It’s done differently. it is done the same. I solved it

^ Agreed and there are two ways of getting to this number: 1) Paper Portfolio - Actual Portfolio (actual portfolio only includes executed shares, and excludes missed missed opportunity costs; missed opportunity price is accounted in paper portfolio since it uses the last price (i.e., when the decision to buy more share is abndoned), so if you do the math it is included 2) explicit costs + implicit costs (implicit costs include delay, realized profit/loss, and missed opportunity, and also uses appropriate ratios of filled/total and unfilled/total; explicit costs = tansaction costs) Using both methods you should come to the same number at the end.