Portfolio Execution, Monitoring

and Rebalancing

Trading Costs
Volume weighted average price (VWAP)

Weighted (based on volumes) average of

execution price
Misguiding when trader dominates trading
Easily manipulated but still better than opening
price as measurement index
Recognize implicit but not explicit costs

Trading Costs
Implementation Shortfall

Most accurate as cannot be easily manipulated

Incorporates both explicit and implicit costs
Difference between actual portfolios return and
paper (reference) portfolios return
IS

Re ference portfolio gain actual portfolio gain

Re ference portfolio investment

Trading Costs
Implementation Shortfall components
Explicit cos ts

Re alized gain / loss

Delay costs

(commision , fee, taxes etc.)

Re ference portfolio investment

execution price previous day close shares purchased

X
benchmark price
shares ordered

previous day close benchmark price shares purchased

X
benchmark price
shares ordered

Missed opportunity cos ts

cancellation price benchmark price shares NOT purchased

X
benchmark price
shares ordered