The article discusses the problems in implementing investment decisions.
Implementing investment decisions can be costly and these costs arise
in executing decisions, which is the execution cost, and in failing
to execute decisions, which is the opportunity cost. These costs
lead to a shortfall in portfolio performance. The shortfall can be
measured by managing a paper portfolio that reflects the output of
an investor's investment process, then comparing the performance
of this portfolio with that of the real portfolio. The amount of
shortfall will depend on the type of decisions the investor is trying
to implement and how good he is at implementing them. Execution costs
and opportunity costs are at opposite ends of the equation. Lowering
one generally increase the other. To reduce the shortfall, the investor
must lower one by more than he increases the other.
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