Hello Dears,
on page 147 in CFA Curriculum there an an example about implementation shortfall.
On Monday, the shares of Impulse Robotics close at £10.00 per share.
On Tuesday, before trading begins, a portfolio manager decides to buy Impulse Robotics.
An order goes to the trading desk to buy 1,000 shares of Impulse Robotics at £9.98
per share or better, good for one day. The benchmark price is Monday’s close at £10.00
per share. No part of the limit order is filled on Tuesday, and the order expires.
The closing price on Tuesday rises to £10.05.
On Wednesday, the trading desk again tries to buy Impulse Robotics by entering a new
limit order to buy 1,000 shares at £10.07 per share or better, good for one day. During
the day, 700 shares are bought at £10.07 per share. Commissions and fees for this
trade are £14. Shares for Impulse Robotics close at £10.08 per share on Wednesday.
No further attempt to buy Impulse Robotics is made, and the remaining 300 shares of
the 1,000 shares the portfolio manager initially specified are canceled.
The paper portfolio traded 1,000 shares on Tuesday at £10.00 per share. The return
on this portfolio when the order is canceled after the close on Wednesday is the value
of the 1,000 shares, now worth £10,080, less the cost of £10,000, for a net gain of
£80.
The real portfolio contains 700 shares (now worth 700 × £10.08 = £7,056), and the cost of this portfolio is 700 × £10.07 = £7,049, plus £14 in commissions and fees, for a total cost of £7,063. Thus, the total net gain on this portfolio is –£7. The implementation shortfall is the return on the paper portfolio minus the return on the actual portfolio, or £80 – (–£7) = £87.
now my question is> the limit order price is 9.98 but they use the benchmark price which is 10 for the calculations. i believe the limit order price here is the decision price that’s why it should be used and not the benchmark price. am i wrong?