How is the cost of a real portfolio determined in implementation shortfall?

In the context of implementation shortfall, the determination of the cost of a real portfolio involves accurately capturing the trading costs and the execution prices associated with a portfolio's real-world transactions.

The correct choice outlines that the cost of a real portfolio is calculated by multiplying the number of shares executed by the execution price, adding in the trading costs incurred during the transaction. This reflects the true economic impact of executing trades in the market, as it accounts not only for the price at which the shares were executed (which can vary from the market price due to factors such as liquidity and market impact) but also includes commissions and any other trading fees.

Implementation shortfall measures the difference between the expected return of a portfolio and its actual return, which is influenced by the costs incurred when buying or selling the securities needed to construct or manage that portfolio. By factoring in both the execution price and trading costs, this method provides a comprehensive view of the true cost of executing trades against the intended investment strategy.

Other choices do not accurately represent the calculation relevant to implementation shortfall. They may miss elements such as trading costs or focus on incorrect parameters that do not capture the comprehensive trading impact on the portfolio's value.