I have to look at the problem to comment more, but I am fully confident if csk says its solved the same both methods should work.
volkovv Wrote: ------------------------------------------------------- > I have to look at the problem to comment more, but > I am fully confident if csk says its solved the > same both methods should work. it is just phrased differently there. Very differently. Got me confused too
It is done differently. The Mkt Impact and Delay costs are only difference in Share Prices. Teh Missed Trade is Share price difference x unfilled/order ratio.
The reading is different this year vs 2006 so that could be why. Its not called Implementations SF in the 2006 LOS
Thsi was the old readign: 4. “Implementing Investment Strategies: The Art and Science of Investing,” Ch. 17, Wayne H. Wagner and Mark Edwards, Handbook of Portfolio Management, Frank J. Fabozzi, ed. (Frank J. Fabozzi Associates, 1998)
that could easilly explain why, and if this is the case, there is no point to get hang up on how it was solved in 2006; this year we are expected to solve it like it is done in this year reading
Thanks guys, this clears up the confusion and makes me feel better.
Anyone else having trouble with the term “realized profit/loss”? It sounds like the profit you get from your total position, but it seems to be more like the amount that can be attributed to whether the price moved in your favor or against you between putting in a realistic trade order and getting it filled with however many shares were actually filled. It’s a combination of “market impact” and “stochastic luck” (however the prices wander while you’re filling the order), not a true realized profit or loss. I put together a nice diagram in my book that goes through the different parts of the implementation shortfall model, and helps me think it through, but I can’t reproduce it here. Basically it is a rectangle defined by the “initial decision price” and “closing prices” on the Y axis of a graph and 0 to total number of shares (in the paper portfolio) on the X axis. Once you have this rectangle, you can view the total area of the rectangle as representing the gain of the paper portfolio, and you start to carve out parts of the rectangle to represent different transaction costs. I then draw a vertical line down this rectangle to divide the filled shares from the unfilled shares, using the X axis to guide me. I said that the X axis represents shares, but you could equally have X go from 0 to 1 and look at it as proportion of traded shares. Then one part of the rectangle represents the area attributable to Opportunity Cost. In the remaining part of the rectangle (representing filled shares), I draw a horizontal line at the first “realistic” trade price. The area between the bottom and this line represents the Delay Cost. Then I draw a horizontal line (in the filled shares section again) at the average fill price. This creates an area representing that “Realized Profit/Loss” section that I was complaining about. What remains is ALMOST the unrealized profit or loss from the trade (i.e. what you get after transaction costs). I say “almost” because you still have to subtract the explicit transaction costs from that segment, and there isn’t a nice geometric way to visualize it. But it’s easy enough to do that subtraction at the end. If you take the time to draw it out, it makes a lot of sense and will help considerably.
Realized P/L is the same as Mkt Impact Cost, thats all you need to know 