When calculating expected return net of execution costs, what is the first step?

The first step in calculating expected return net of execution costs is to determine the roundtrip cost of execution. Execution costs encompass both the direct expenses incurred during trade execution, such as commissions and fees, and the indirect costs associated with market impact and slippage. By identifying the roundtrip cost, which includes both the buying and selling costs, an investor can effectively account for these expenses before evaluating net returns.

This step is crucial because it sets the foundation for accurately assessing the net returns on trades. Once the costs are understood, the calculation can proceed to consider other factors such as the total market value of executed trades or the number of shares traded, but these are secondary to establishing the execution cost itself. Understanding the impact of costs on the expected return aids investors in making more informed decisions when evaluating trading strategies.