Chapter 4
Mutual Funds
Concept Questions
1. Mutual funds are owned by fund shareholders. A fund is run by the fund manager, who is hired by
2. A rational investor might pay a load because he or she desires a particular type of fund or fund
manager for which a no-load alternative does not exist. (This is rarely the case.) More generally,
3. The NAV of a money market mutual fund is never supposed to change; it is supposed to stay at a
4. A money market deposit account is essentially a bank savings account. A money market mutual fund
5. ETFs are very popular with active traders since they allow an investor to use margin to purchase the
6. In an up market, the cash balance will reduce the overall return since the fund is partly invested in
assets with a lower return. In a down market, a cash balance should help reduce the negative returns
7. 12b-1 fees are designed to pay for marketing and shareholder service costs. It does not really make
8. You should probably buy an open-end fund because the fund stands ready to buy back shares at NAV.
9. While the particular time period was a strong one, the bigger issue here is “survivorship” bias. Funds
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Education.
Core Questions
NOTE: All end of chapter problems were solved using a spreadsheet. Many problems require multiple
steps. Due to space and readability constraints, when these intermediate steps are included in this
solutions manual, rounding may appear to have occurred. However, the final answer for each problem is
found without rounding during any step in the problem.
Intermediate
11. Turnover = X/$3,400,000,000 = .42; X = $1,428,000,000. This is more than the $1.25 billion in sales,
12. Management fee = .0045($3,400,000,000) = $15,300,000
13. Initial NAV = $47.10(1 – .05) = $44.75
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Education.
Note, there is another interpretation of the solution. To calculate the final NAV including fees, we
would first find the final NAV excluding fees with an 8 percent return, which would be:
Now, we can find the final NAV after the fees, which would be:
Notice this answer is $0.06 different than our original calculation. The reason is the assumption
behind the fee withdrawal. The second calculation assumes the fees are withdrawn entirely at the end
As with the Fisher equation, effective annual rates must be used. So, we would need to know the
14. Yr 1: There is no performance fee since the manager had a negative return. So, the only year 1 fee is
Yr 2: The management fee is taken out at the beginning of the year on the new balance, so it is:
The performance fee is 20% of everything over the $1,250,000 high water mark.
15. The cost of the ETF is ($25,000 × .0009) + $25 = $47.50
16. After 3 years: (For every dollar invested)
Class A: $0.9425(1 + .10 – .0023 – .0073)3 = $1.22191
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Education.
17. (1 + .033 – .001)2 = (1 – .06)(1 + R – .0175)2; 1.065 = .94(1 + R – .0175)2; R = 8.19%
18. National municipal fund: after-tax yield = .032(1 – .08) = 2.94%
19. National municipal fund: after-tax yield = 3.20%
20. ($14.29 – NAV) / NAV = –.069; NAV = $15.35
21. NAV at IPO = $10(1 – .08) = $9.20
CFA Exam Review by Kaplan Schweser
1. a
The biggest disadvantage of the fund of funds is the extra layer of fees. Style drift could impact
2. b
3. a
4. b
Benchmarks are available for commodities, real estate, private equity, and hedge funds, though
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Education.