Questions / Quant research, Backtest integrity
Turnover consumes gross alpha
A hypothetical strategy earns 5 basis points gross per day. Total traded notional, counting buys and sells, equals twice portfolio NAV per day. Trading cost is 2 basis points per unit of traded notional. What is net daily return in basis points?
Answer it in the app It's free. You get hints, a second try if you miss, and a follow-up question.
Show the answer and worked solution
Answer: 1 bps
- The traded notional is 2 × NAV and already includes both buys and sells.
- At 2 basis points per traded notional, the cost relative to NAV is 2 × 2 = 4 basis points.
- Subtract cost from gross return: 5 − 4 = 1 basis point net.
Interview shortcut. Net = gross − turnover × cost = 5 − 2 × 2.
Takeaway. Align the cost denominator with the turnover definition.
In the app this has a follow-up where one thing about the setup changes. Try the follow-up.