AdvancedMultiple choice
A signal that trades too much · Part 3 of 3
A daily-rebalanced long–short signal earns a gross return of 12% a year on its book. It trades 20% of the book each day, and each unit traded costs 5 basis points. Use 252 trading days.
Smoothing the signal halves its turnover but cuts the gross return to 10%. Above what cost per unit traded does the smoothed version earn more net?
- ANever: the gross return falls, so the original is always better
- BAlways: halving turnover halves the cost, which must be worth it
- CAbove about 23.8 bp, the original strategy’s breakeven
- DAbove about 7.9 bp
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