# Implementation Shortfall

Long story short: Do you use decision price or previous close in the denominator when computing Realized Profit/Loss? Short story long: Volume 5- pg 303- Realized Profit Loss use 10 in the demoninator…10 is the decision price on Monday…Tuesday nothing happened stock closed @ 10.05…Wed shares were executed Different problem… Pg A-24 for Question 11B the Realized Profit Loss on Tuesday uses 9.99 in the denominator which is the previous close…not the decision price This 2 conflict each other

Always using benchmark price in denominator except when figuring out % of Explicit costs then use Paper port investment

so by that you mean…your decision price correct?..not the previous close

If the trade is canceled on the second day, then previous day close is the same as benchmark (decision) price. There is no delay cost for this trade.

you will always use benchmark price x original shares ordered = paper portfolio investments in the denominator for all components (ultimately) it’s the numerator which is always dependent on actual shares and “other prices”.

Yes…you r right… I just took a closer look @ the questions and it specifically states for the end of chapter problem…that the benchmark price on tuesday changed to 9.99 thanks for the help

Damnit…I’m all messed up again… Q11 in the end of the chapter is really screwing me up. They don’t mention any previous closing prices and I can’t consistently apply any of the formulas that I thought were right…would somebody mind walking me throught it or @ least throwing on some tips. The textbook doesn’t offer any solid formulas they even say for the example in the chapter (assumed here to be “xyz”)

hmm any takers? I know somebody else out there should be reviewing Implementation Shortfall this evening. Q11 end of chapter question…CFA text…no previous close price is listed in the problem…they change the “benchmark Price”…sounds tempting, doesnt it?

Here’s how I see it (worked so far on all problems i’ve tried): 1: paper portfolio investment = # shares wanted x benchmark price 2: paper portfolio ending value = # shares wanted x closing price 3: gain = 2 - 1 (on paper portfolio 4. actual investment = # shares filled x price filled at + commissions 5. actual ending value = # shares filled x closing price 6. gain = 5-6 implementation shortfall = 3 - 6 Components: Assume x = 1 above, then a. Explicit costs = commisions / x b. Delay costs = (previous day closing price - benchmark) x shares purchased / x c. Realized loss = (execution price - previous day close) x shares purchased / x d. Miss oppurtunity = (cancelled price - benchmark) x shares not purchased / x implementation shortfall = 3. - 6. = a + b + c + d

elcaro- you said that benchmark price is always in the denominator but on pg A-24 for Delay on Tuesday…they use 10…instead of 9.99…which they said is the new benchmark price For the the Tuesday Realized Profit/loss…they use 9.99 in the denominator

^ Wrong

Ther eis usually an Original Benchmark and a Revised Benchmark…

Prockets- thats what I thought…but that would not work for Question 11…they use 9.99 in the demoninator…but only once…and 10 for everything else so for 1 peice of the puzzle…they stopped using x…and started using something diff in this case the 9.99

You made me get out a cfai Book. where does it say 9.99 ?

Are you talking about the 9.98?

^ u r the best… pg A-24 they use 9.99 in the denominator for Tuesday realized profit/loss

yeah, I see what you’re saying…not sure why they divided by 9.99. it’s either b/c they mention the revised benchmark price, or an error. I lean towards error, because it should reconcile to the difference between paper portfolio and actual investment. Using this intermediate denominator would throw that out. It works in the problem b/c the rounding to too far out so it doesn’t matter.

See that people…a potential error… could we get anybody to 2nd, 3rd, and 4th that statement?

Hi, if you are willing to think of it differently (not how the textbook teaches) then try this: Think of it as TRADED and RESIDUALS. There is only one benchmark price (the Implementation price, ie the FIRST number they give you at the start of the trade…in this case it’s \$10, from Monday. so TRADED = 600 * .02 [from 10.02-10.00] = 12 100 * .08 [from 10.08-10.00] = 8 TRADED = 20 RESIDUALS= 300 * .05 [from 10.05-10.00] = 15 TOTAL = TRADED + RESIDUALS 35 = 20 +15 then add the Commissions crap 35 + 20 +12 = 67 buckeroos.

i like it…but the problem is that I anticipate them asking us to calc the specific components: Delay Explicit Realized Profit/Loss Missed trade opportunity cost