Part I

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?

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?

Part II

2. Why can a closed- end investment company sell for a discount from net asset value but a mutual fund cannot sell for a discount?

3. What differentiates a real estate investment trust (REIT) from a firm involved in building, developing, and owning properties? What differentiates a mortgage trust from an equity trust? What advantages do REITs offer investors over direct investments in real estate properties?

4. Using the information on the taxation of REIT distributions, what was the tax status of recent annual distributions made by Plum Creek Timber (PCU), UDR Inc. (UDR), and Washington Real Estate Investment Trust (WRE)?

5. How do exchange- traded funds (ETFs) differ from mutual funds? Why may they be considered alternatives to index mutual funds?

8. Why are hedge funds and private equity funds of little interest to most investors?

Problem 4

The portfolio manager of a hedge fund believes that stock A is undervalued and stock B is overvalued. Currently their prices are $ 30 and $ 30, respectively. The portfolio man-ager of the fund buys 100 shares of A and sells 100 shares of B short.

a) Why does the portfolio manager establish these two positions?
b) What is the initial cash outflow from the two positions?
c) What are the net profits and losses on the positions if, after a period of time, the prices of each stock are

Price of A Price of B
$ 25 $ 25
27.50 27.50
30 30
32.50 32.50
35 35

d. What are the net profits and losses if, after a period of time, the prices are

Price of A Price of B
$ 30 $ 30
32.50 27.50
35 25
37.50 22.50
40 20

e. What are the net profits and losses if, after a period of time, the prices are

Price of A Price of B

$ 30 $ 30
27.50 32.50
25 35
22.50 37.50
20 40

f. What are the net profits and losses on the positions if, after a period of time, the prices of each stock are
Price of A Price of B

$ 25 $ 20
27.50 25
30 30
32.50 35
35 40

g. What are the net profits and losses on the positions if, after a period of time, the prices of each stock are

Price of A Price of B
$ 25 $ 27.50
27.50 28.25
30 30
32.50 31.25
35 32.50

h. What are the net profits and losses on the positions if, after a period of time, the prices of each stock are

Price of A Price of B
$ 25 $ 35
27.50 32.50
30 30
32.50 27.50
35 25

I. For the portfolio manager's expectation to be fulfilled, the prices of the stocks have to follow which of the above six patterns? What are the implications if the other patterns of stock prices occur?