Ch.10 · Benchmarks and Performance Evaluation · hard
What is 'impact cost' in mutual fund portfolio management?
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EXPLANATION
Impact cost is the additional cost incurred when executing large orders because the order itself moves the market. For example, a large buy order pushes prices up, so the average purchase price is higher than the pre-trade price. For mutual funds with large AUMs, impact cost is a significant hidden transaction cost, especially in illiquid small/mid cap stocks. It reduces actual portfolio returns.
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