Isn't it difficult to calculate implementation shortfall as a whole?

CFA Level III
#1

I found I was always struggling in calculate the implementation shortfall as a single number($ or %) instead of individual components. Any suggestion to deal with it in an easy way?

#2

provide a problem

will give you solution.

Paper Portfolio Return = # of Shares to be traded (End Price - Begin Price) — … (A)

Actual Portfolio:

End Value = # of Shares Actually Traded * End Price … (B)

Beginning Value = # of Shares Actually Traded * Purchase Price + Commissions ©

Actual Portfolio Return = (B) - © …(D)

Implementation Shortfall $ amount = (A) - (D) …(E)

Implementation Shortfall BPS = (E) / (# of Shares to be Traded * Benchmark Price)

#3

For Problem 11 EOC

Paper Portfolio = 1000 * (10.05 - 10.00) = 50

Actual Portfolio:

End Value = 700 * 10.05 = 7035

Beginning Value: 600*10.02 + 100 * 10.08 + 20 + 12 = 7052

Actual Portfolio return = 7035 - 7052 = -17

Implementation Shortfall = 50 - (-17) = 67

In BPS = 67/ (1000*10) = 67 BPS

#4

Implementation short fall = (Profit on paper portfolio - Profit on real portfolio - commissions) / (Initial paper portfolio value)

#5

I still need to review the stuff but off my memory i think i did:

IS= return on paper portfolio-return on actual portfolio

where :

return on paper portfolio = n[desired]*(Pcancel-Pbenchmark)

return on actual portfolio = n[total actual]*Pcancel-(n[actual day 1]*Pactual[day 1]+fees[day 1]+…+n[actual day n]*Pactual[day n] + fees [day n])

may/may not be some mistake…will check up on it later.

#6

This will not be asked right?. they will always ask the separate components of implementation shortfall.

#7

This is fair game. review EOC 11 from that reading for practice.

#8

How would you know if the numbers you calculated were right or not?

#9

Calculating Implementation short fall as a whole is easier than calculating the break down that involves one additional step of breaking implicit costs into realized loss and dealy costs.

Spend an hour when you are less stressed (hopefully). You should get it.

#10

Implementation shortfall calculation is brute memorization.

#11

it is easy - can learn in 10 minutes

#12

Disagree. This is nothing compared to Global Investment Performance allocation calculations that include international benchmark, indexes, currencies, dividends and selection returns breakdown with summations and weights. That’s a killer.

#13

Apparently not to traders since one of the disadvantages to Imp S/F is that traders just don’t get it. (my words - sorry to any traders out there!)

#14

^ nice

#15

anyone know good rule of thumb for delay/slippage vs. loss/gain portion? I always get it mixed up. other parts are simple.

#16

Janardhan had provided a good way to look at it

Total (Realized + Delay) = # Traded * (Execution Price - Benchmark Price)

= # Traded * (Execution - Close + Close - Benchmark Price)

= # Traded * (Execution - Close) + # Traded * (Close - Benchmark Price)

= Realized + Delay

#17

An exam-tips question…

In practice, I often use short-form letters, such as I/S = 50 - (-17) = 67. But this is not acceptable in the exam since nobody knows what I/S is. If I don’t re-state my answer at the end, it could cost points.

CPK’s format look better.

Implementation Shortfall = 50 - (-17) = 67

To have a neat answer, it seems to me that step 1-2-3 must be very clear in mind.

My question: When a question asks to calculate a few components (for example, delay cost and realized profit/cost), any suggestion to write down the answer quickly and not losing point?