Understanding Transaction Costs in Portfolio Management

As a portfolio manager, understanding transaction costs is crucial in the context of trading and rebalancing investment portfolios. Transaction costs can significantly impact the performance of the portfolio, influencing the decision-making process regarding when and how to execute trades.

Discuss the types of transaction costs that a portfolio manager should consider when executing trades. Consider costs such as brokerage fees, bid-ask spreads, market impact, and opportunity costs. Provide examples of how these costs can affect investment performance, particularly in active portfolio management strategies.