test
ERIC WANG
Chapter4solution.pptx
4. Mutual funds and other investment companies
Instructor: Seongcheol Paeng
7/2/2020
1
Assignments
Problem Sets (Paraphrase with your own words.)
1. Explain 4 functions of investment companies for their investors.
1. Record keeping and administration. Investment companies issue periodic status reports, keeping track of capital gains distributions, dividends, investments, and redemptions, and they may reinvest dividend and interest income for shareholders.
2. Diversification and divisibility. By pooling their money, investment companies enable investors to hold fractional shares of many different securities. They can act as large investors even if any individual shareholder cannot.
3. Professional management. Investment companies can support full-time staffs of security analysts and portfolio managers who attempt to achieve superior investment results for their investors.
4. Lower transaction costs. Because they trade large blocks of securities, investment companies can achieve substantial savings on brokerage fees and commissions.
7/2/2020
2
Assignments
Problem Sets (Paraphrase with your own words.)
2. Consider a mutual fund that manages a portfolio of securities worth $230 million. Suppose the fund owes $3 million to its investment advisers and another $2 million for rent, wages due, and miscellaneous expenses. The fund has 5 million shares outstanding. Net asset value?
Net asset value = ($230 million − $5 million) / 5 million shares = $45 per share
7/2/2020
3
Assignments
Problem Sets (Paraphrase with your own words.)
3. Explain about Hedge Fund.
Hedge Funds: Like mutual funds, hedge funds are vehicles that allow private investors to pool assets to be invested by a fund manager. Unlike mutual funds, however, hedge funds are commonly structured as private partnerships and thus subject to only minimal SEC (U.S. Securities and Exchange Commission) regulation.
Lock-ups allow hedge funds to invest in illiquid assets without worrying about meeting demands for redemption of funds. Moreover, because hedge funds are only lightly regulated, their managers can pursue investment strategies involving, for example, heavy use of derivatives, short sales, and leverage; such strategies typically are not open to mutual fund managers.
7/2/2020
4
Assignments
Problem Sets (Paraphrase with your own words.)
4. Explain Fee Structure.
Operating Expenses: Operating expenses are the costs incurred by the mutual fund in operating the portfolio, including administrative expenses and advisory fees paid to the investment manager. These expenses, usually expressed as a percentage of total assets under management, may range from .2% to 2%. In addition to operating expenses, many funds assess fees to pay for marketing and distribution costs. Front-End Load: A front-end load is a commission or sales charge paid when you purchase the shares. Back-End Load: A back-end load is a redemption, or “exit,” fee incurred when you sell your shares. 12b-1 Charges: The Securities and Exchange Commission allows the managers of so-called 12b-1 funds to use fund assets to pay for distribution costs such as advertising, promotional literature including annual reports and prospectuses, and, most important, commissions paid to brokers who sell the fund to investors. These 12b-1 fees are named after the SEC rule that permits use of these plans. Many funds offer “classes” that represent ownership in the same portfolio of securities, but with different combinations of fees. Each investor must choose the best combination of fees. Loads are paid only once for each purchase, whereas 12b-1 fees are paid annually. Thus, if you plan to hold your fund for a long time, a one-time load may be preferable to recurring 12b-1 charges.
7/2/2020
5
Assignments
Problem Sets (Paraphrase with your own words.)
5. To see how expenses can affect rate of return, consider a fund with $200 million in assets at the start of the year and with 5 million shares outstanding. The fund invests in a portfolio of stocks that provides no income but increases in value by 8%. The expense ratio, including 12b-1 fees, is 2%. What is the rate of return for an investor in the fund?
Initial NAV = $200m/5m shares = $40 per share
In the absence of expenses: fund assets =$200mX1.08 = $216m
NAV = $216m/5m=$43.20 per share
portfolio worth =$216m-$200mX0.02=$212m
NAV =$212m/5m=$42.40 per share
Rate of return = ($42.40-$40)/$40=2.4/40=0.06=6%
7/2/2020
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6
Assignments
Problem Sets (Paraphrase with your own words.)
6. An investor’s portfolio currently is worth $1 million. During the year, the investor sells 500 shares of FedEx at a price of $180 per share and 3,000 shares of Cisco at a price of $30 per share. The proceeds are used to buy 1,000 shares of IBM at $160 per share.
a. What is the portfolio turnover rate?
$180 X 500 + 3,000 X $30 = $180,000
Turnover = $180,000 in trades per $1 million of portfolio value = 18%.
b. If the shares in FedEx originally were purchased for $140 each and those in Cisco were purchased for $20, and the investor’s tax rate on capital gains income is 20%, how much extra will the investor owe on this year’s taxes as a result of these transactions?
Realized capital gains: $(180-140)× 500 = $20,000 (FedEx)
$(30-20)× 3,000 = $30,000 (Cisco)
Tax: .20× $(20,000+30,000) = $10,000.
Deadline: before the class (7/1)
Submit it via email to [email protected]
7/2/2020
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