In implementation shortfall analysis, what is added to the cost of shares executed?

In implementation shortfall analysis, the cost of shares executed includes various components that account for the complete cost associated with trading. Trading costs are added because they directly influence the overall expense incurred during the execution of trades. This includes elements such as brokerage commissions, bid-ask spreads, and any market impact costs that arise when executing large orders.

Understanding implementation shortfall requires recognizing that it measures the difference between the initial decision price (the theoretical price one would have wanted to trade at) and the final execution price, including all associated trading expenses. By incorporating trading costs, the analysis provides a clear picture of the performance of trades relative to the intended strategy, allowing for better decision-making in future trading activities.

In contrast, while concepts like decision price, closing price, and value of the real portfolio are relevant in a broader context, they do not reflect the direct additional costs incurred when shares are executed in the implementation shortfall analysis.