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Trading cost sensitivity
Change transaction costs and compare a strategy before and after costs.
What it shows
Trading costs reduce the return retained from a strategy. Turnover measures how much of the portfolio is traded, so frequent rebalancing can magnify small per-trade costs.
Example
If turnover is twice the portfolio value and one-way trading cost is 10 basis points, the approximate cost drag is 20 basis points before compounding.
Assumptions and limits
Use a consistent definition of turnover and cost units. Apply costs when trades occur, rather than subtracting a single charge only at the end.
A simple cost rate does not capture changing spreads, market impact, liquidity constraints, or the price at which an order actually fills.
Each net return equals gross return minus turnover × bps / 10,000. A switch from −1 to +1 has turnover 2. Costs are charged before compounding. This simplified model excludes market impact and financing.
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