What is the calculation for percentage implementation shortfall?

The calculation for percentage implementation shortfall is determined by taking the total dollar implementation shortfall and dividing it by the cost of the paper portfolio. This approach provides a clear measure of how much underperformance can be attributed to execution delays or trading inefficiencies as a percentage of the expected performance based on the initial plan or paper portfolio.

Implementation shortfall quantifies the difference between the expected return of a hypothetical portfolio (the paper portfolio) and the actual return of the real portfolio after considering the costs incurred during the trading process. By expressing this difference as a percentage of the cost of the paper portfolio, analysts can effectively assess the efficiency of the trading strategy and the impact of market conditions on investment performance.

In this context, using the dollar implementation shortfall ensures that the measurement reflects the absolute impact of trading decisions relative to planned costs, allowing for easier comparisons across different trades or strategies. The importance of this metric lies in its ability to highlight how efficiently trades are executed and inform better trading practices in the future.