Part -1:
1. What is the net asset value of an investment company with $10,000,000 in assets, $790,000 in current liabilities, and 1,200,000 shares outstanding?
2. If a mutual fund's net asset value is $23.40 and the fund sells its shares for $25, what is the load fee as a percentage of the net asset value?
3. If an investor buys shares in a no-load mutual fund for $31.40 and the shares appreciate to $44.60 in a year, what would be the percentage return on the investment? If the fund charges an exit fee of 1 percent, what would be the return on the investment?
4. An investor buys shares in a mutual fund for $20 per share. At the end of the year the fund distributes a dividend of $0.58, and after the distribution the net asset value of a share is $23.41. What would be the investor's percentage return on the investment?
5. Consider the following four investments.
a) You invest $3,000 annually in a mutual fund that earns 10 percent annually, and you reinvest all distributions. How much will you have in the account at the end of 20 years?
b) You invest $3,000 annually in a mutual fund with a 5 percent load fee so that only $2,850 is actually invested in the fund. The fund earns 10 percent annually, and you reinvest all distributions. How much will you have in the account at the end of 20 years? (Assume that all distributions are not subject to the load fee.)
c) You invest $3,000 annually in a no-load mutual fund that charges 12b-1 fees of 1 percent. The fund earns 10 percent annually before fees, and you reinvest all distributions. How much will you have in the account at the end of 20 years?
d) You invest $3,000 annually in no-load mutual fund that has a 5 percent exit fee. The fund earns 10 percent annually before fees, and you reinvest all distributions.
How much will you have in the account at the end of 20 years? In each case you invest the same amount ($3,000) every year; the fund earns the same return each year (10 percent), and you make each investment for the same time period (20 years). At the end of the 20 years, you withdraw the funds. Why is the final amount in each mutual fund different?
6. You are given the following information concerning several mutual funds:
| Fund |
Return in Excess of the treasury Bill rate |
Beta |
| A |
12.40% |
1.14 |
| B |
13.2 |
1.22 |
| C |
11.4 |
0.9 |
| D |
9.8 |
0.76 |
| E |
12.6 |
0.95 |
During the time period, the Standard & Poor's stock index exceeded the Treasury bill rate by 10.5 percent (i.e., rm - rf. = 10.5%).
a) Rank the performance of each fund without adjusting for risk and adjusting for risk using the Treynor index. Which, if any, outperformed the market? (Remember, the beta of the market is 1.0.)
b) The analysis in part (a) assumes each fund is sufficiently diversified so that the appropriate measure of risk is the beta coefficient.
Suppose, however, this assumption does not hold and the standard deviation of each fund's return was as follows:
| Fund |
Standard Deviation of Return |
| A |
4.50% |
| B |
3.1 |
| C |
1 |
| D |
1.4 |
| E |
3.5 |
Thus, fund A earned a return of 12.4 percent, but approximately 68percent of the time this return has ranged from 7.9 percent to 16.9 percent. The standard deviation of the market return is 0.01 (i.e., 1 percent), so 68 percent of the time, the return on the market has ranged from 9.5 to 11.5 percent. Rank the funds using this alternative measure of risk. Which, if any, outperformed the market on a risk-adjusted basis?
Part -2:
1. a) A closed-end investment company is currently selling for $10 and its net asset value is $10.63. You decide to purchase 100 shares. During the year, the company distributes $0.75 in dividends. At end of the year, you sell the shares for $12.03. At the time of the sale, net asset value is $13.52. What percentage return do you earn on the investment? What role does the net asset value play in determining the percentage return?
b) A closed-end investment company is currently selling for $10 and you purchase 100 shares. During the year, the company distributes $0.75 in dividends. At end of the year, you sell the shares for $12.03. The commission on each transaction is $50. What percentage return do you earn on the investment?
c) You buy 100 shares in a mutual fund at its net asset value of $10. The fund charges a load fee of 5.5 percent. During the year, the mutual fund distributes $0.75 in dividends. You redeem the shares for their net asset value of $12.03, and the fund does not charge an exit fee. What percentage return do you earn on the investment?
d) You buy 100 shares in a no-load mutual fund at its net asset value of $10. During the year, the mutual fund distributes $0.75 in dividends. You redeem the shares for their net asset value of $12.03, but the fund charges a 5.5 percent exit fee. What percentage return do you earn on the investment?
e) You buy 100 shares in a no-load mutual fund at its net asset value of $10. During the year, the mutual fund distributes $0.75 in dividends. You redeem the shares for their net asset value of $12.03, and the fund does not charge an exit fee. What percentage return do you earn on the investment?f) Compare your answers to parts (a) through (e). What are the implications of the comparisons?
How would each of the following affect the percentage returns?
• You buy and sell stocks through an online broker instead of a full-service broker.
• You are in the 25 percent federal income tax bracket.
• The distributions are classified as long-term instead of short-term term.
• The purchases and sales occur in your retirement account (e.g., IRA).
2. You purchase a REIT for $50. It distributes $3 consisting of $1 in income, $0.50 in long-term capital gains, $0.30 in short-term capital gains, and $1.20 in return of capital. After a year, you sell the stock for $56. If you are in the 30 percent income tax bracket and 15 percent long-term capital gains bracket, what are your taxes owed?