Financial Planning Exercises
1. Estimating cost of mutual fund investments. Using the mutual fund quotes in Exhibit 13.4,
and assuming that you can buy these funds at their quoted NAVs, how much would you
have to pay to buy each of the following funds?
a. American Century Emerging Markets Fund, A shares (AEMMX)
b. American Century Growth Fund, A shares (TCRAX)
c. American Century International Bond Fund, A shares (AIBDX)
d. Artisan Small Cap Value fund Investor Shares (ARTVX)
According to the quotes, which of these four funds have 12b-1 fees? Which have
redemption fees? Are any of them no-loads? Which fund has the highest year-to-date
return? Which has the lowest?
From Exhibit
13.4
Emerging
Markets
AEMMX
Growth Fund
TCRAX
International
Bond Fund
AIBDX
Artisan Small
Cap Fund
ARTVX
Net Asset Value 9.31 29.68 12.41 14.30
2. Building a mutual fund portfolio. Imagine that you’ve just inherited $40,000 from a rich
uncle. Now you’re faced with the problem of deciding how to spend it. You could make a
down payment on a condo—or better yet, on that BMW that you’ve always wanted; or you
could spend your windfall more profitably by building a mutual fund portfolio. Let’s say
that, after a lot of soul-searching, you decide to build a mutual fund portfolio. Your task is
to develop a $40,000 mutual fund portfolio. Use actual funds and actual quoted prices,
invest as much of the $40,000 as you possibly can, and be specific! Briefly describe the
portfolio that you end up with, including the investment objectives that you’re trying to
achieve.
3. Comparing ETF with mutual fund.. Describe an ETF and explain how these funds
combine the characteristics of open- and closed-end funds. Within the Vanguard family of
funds, which would most closely resemble a “Spider” (SPDR)? In what respects are the
Vanguard fund (that you selected) and SPDRs the same, and how are they different? If you
could invest in only one of them, which would it be? Explain.
An ETF is like an open-end fund in that the number of shares outstanding can be increased or
decreased as investors send in more money or redeem shares. An ETF is also like a closed-end
The Vanguard 500 Index Fund would most closely resemble a Spider, as this fund tracks the
performance of the S&P 500 Index just as a Spider does. For buy-and-hold investors, the two
4. Mutual fund family services. What investor service is most closely linked to the notion of
a fund family? If a fund is not part of a family of mutual funds, can it still offer a full range
of investor services? Explain. Using a source such as The Wall Street Journal or perhaps
your local newspaper, find two examples of fund families and list some of the mutual funds
that they offer.
The ability to convert from one fund to another in the family with no transaction fee is the main
The students will most likely go for the big named family of funds: Fidelity, T. Rowe Price,
5. Comparing different types of mutual funds. Using a source like Barron’s, Forbes, Money,
or Morningstar, along with any related Web sites, select five mutual funds—a growth fund,
an index fund, a sector fund, an international fund, and a high-yield corporate bond fund
—that you believe would make good investments. Briefly explain why you selected each of
the funds.
Students should be encourage to prepare a table to report the funds they select. I would not be
6. Contrasting direct and mutual fund investing. Contrast mutual fund ownership with direct
investment in stocks and bonds. Assume that your class is going to debate the merits of
investing through mutual funds versus investing directly in stocks and bonds. Develop some
pro and con arguments for this debate, and be prepared to discuss them in class. If you had
to choose a side, which one would it be? Explain.
Mutual fund investment offers professional management and convenience of purchase and record
keeping. Direct investing offers more specific investing, that is you could invest in only one
company. However, you tend to invest in a portfolio of stock and the mutual fund does that.
7. Comparing risks of different mutual fund types. For each pair of funds listed below, select
the fund that would be less risky and briefly explain your answer.
a. Growth versus growth-and-income
b. Equity-income versus high-grade corporate bonds
c. Intermediate-term bonds versus high-yield municipals
This is a toss-up. High yield municipals may be from Orange County California or Detroit.
d. International versus balanced
Balanced funds has a portfolio of investments from bonds to small caps. International are all
8. Evaluating an ETF. Using the Morningstar information in Exhibit 13.10, evaluate the
performance of the QQQ index-based ETF. Specifically, comment on how well it tracks the
underlying NASDAQ 100 index and how its performance compares with other similar
ETFs.
Annual Return: The annual total returns have exceeded both the S&P 500 TR USD and the US
The price is a bit volatile with a beta of 1.02 and a standard deviation over the past 10 years of
17.9% compared to 14.7% for the S&P 500. However, over the past three years, the standard
Power Shares QQQ ETF is the 11 the most actively traded and sixth-largest U.S. exchange
traded fund. QQQ offers a large helping of large-cap growth stocks with a strong tilt toward the
9. Calculating approximate yield on mutual fund. About a year ago, Ramon Navarrete bought
some shares in the Sapphire Lake Mutual Fund. He bought the fund at $24.50 a share, and
it now trades at $26. Last year, the fund paid dividends of 40 cents a share and had capital
gains distributions of $1.83 a share. Using the approximate yield formula, what rate of
return did Ramon earn on his investment? Repeat the calculation using a handheld
financial calculator. Would he have made a 20 percent rate of return if the stock had risen
to $30 a share?
Trading at $26: Approximate yield = ($2.23 + [($26 – $24.50)/1] ) / {(24.5 + 26)/2] = 3.73 /
25.25 = 14.8%
When using the financial calculator, set on 1 payment/year and End Mode. We will assume that
the mutual fund distributed the dividends and capital gains at the end of the year, a total of $2.23
per share ($0.40 + $1.83). The keystrokes on the left show the return if the value of his stock
10. Calculating mutual fund approximate rate of return. A year ago, the Stellar Growth Fund
was being quoted at an NAV of $21.50 and an offer price of $23.35; today, it’s being quoted
at $23.04 (NAV) and $25.04 (offer). Use the approximate yield formula or a handheld
financial calculator to find the rate of return on this load fund; it was purchased a year ago,
and its dividends and capital gains distributions over the year totaled $1.05 a share. (Hint:
As an investor, you buy fund shares at the offer price and sell at the NAV.)
Trading at $23.04: Approximate yield = ($1.05 + [($23.04 – $23.35)/1] ) / [(23.04 + 23.35/2] =
0.74 / 23.20 = 3.2%
When using the financial calculator, set on 1 payment/year and End Mode. We will assume that
the mutual fund distributed the dividends and capital gains at the end of the year.
23.35 +/- PV
11. Calculating and evaluating mutual fund returns. Here is the per-share performance
record of the Abacus Growth-and-Income fund for 2017 and 2016:
2017 2016
1. Net asset value, beginning of period: $58.60 $52.92
2. Income from investment operations:
3. Net investment income $ 1.39 $ 1.35
4. Net gains on securities (realized and unrealized) 8.10 9.39
5. Total from investment operations $ 9.49 $10.74
6. Less distributions:
7. Dividends from net investment income ($ .83) ($ 1.24)
8. Distributions from realized gains (2.42) (3.82)
9. Total distributions ($3.25) ($ 5.06)
10. Net asset value, end of period: $64.84 $58.60
Use this information to find the rate of return earned on this fund in 2016 and in 2017.
What is your assessment of the investment performance of this fund for the 2016–2017
period?
Trading at $58.60: Approximate yield = ($5.06 + [($58.60 – $52.92)/1] ) / [($58.60 +
$52.92)/2] = 10.74 / 55.76 = 19.3%
When using the financial calculator, set on 1 payment/year and End Mode. We will assume that
the mutual fund distributed the dividends and capital gains at the end of the year, a total of $5.06
per share in 2014 and $3.25 per share in 2015. The keystrokes on the left show the return for
Abacus Growth-and-Income Fund generated a rate of return of almost 20% in 2014 and over
15% in 2015. This appears to be an impressive return record—but to put it in perspective, you
12. Different ways to invest in real estate. Assume that you’ve just inherited $100,000 and
wish to use all or part of it to make a real estate investment.
a. Would you invest directly in real estate, or indirectly through something like a REIT?
Explain.
One guiding principle of investing is to invest in what you know about and understand. If you
live in Virginia, it will be risky to purchase a specific real estate property in Montana when you
b. Assuming that you decided to invest directly, would you invest in income-producing
property or speculative property? Why? Describe the key characteristics of the types of
income producing or speculative property you would seek.
One of the most popular forms of real estate investing is income (or income- producing)
property, which includes commercial and residential properties. Investments in income
One approach that’s popular with many investors is to speculate in raw land. In this approach,
So you have income property with a low risk compared to speculating with high risk. The choice
c. What financial and nonfinancial goals would you establish before beginning the search
for suitable property?
Basic goal income v appreciation. If you are buying real estate for income you look to property
d. If you decide to invest in real estate indirectly, which type(s) of securities would you buy,
and why?
Options are a real estate investment trust (REIT), which is a type of closed-end investment
company that invests money in various types of real estate and real estate mortgages. Another
option is a special-purpose syndicates organized to invest in real estate are another type of real
13. Investing in residential income-producing property. Mallory Comer is thinking about
investing in some residential income-producing property that she can purchase for
$200,000. Mallory can either pay cash for the full amount of the property or put up $50,000
of her own money and borrow the remaining $150,000 at 8 percent interest. The property is
expected to generate $30,000 per year after all expenses but before interest and income
taxes. Assume that Mallory is in the 28 percent tax bracket. Calculate her annual profit and
return on investment, assuming that she (a) pays the full $200,000 from her own funds or
(b) borrows $150,000 at 8 percent. Then discuss the effect, if any, of leverage on her rate of
return.
No Leverage Leveraged
Owner investment $200,000 $ 50,000
Borrowed Money 0 150,000
Total Investment $200,000 $200,000
Earnings Before Interest and Income taxes $ 30,000 $ 30,000
Less: Interest (8% × 150,000) 0 12,000
Earnings before taxes $ 30,000 $ 18,000
Less: Income taxes (28%) 8,400 5,040
Earnings after taxes $ 21,600 $ 12,960
Return on Investment = Earnings after taxes
Amount of owner investment
$ 21,600 $ 12,960
$200,000 $ 50,000
10.8% 25.92%
By using leverage, she was able to increase her return on her investment. This is due to the fact
that the rate of interest was less than her return on investment with no leverage. Note
14. Choosing a REIT to invest in. Choose two REITS from a list available at
https://www.reit.com/investing/investor-resources/reit-directory/reits-sp-indexes. Using
information you can find on this Web site and other Internet sites, prepare a comparison
that includes:
a. The type of REIT that each represents.
b. The type and quality of the properties that they hold.
c. Each REIT’s financial performance and management track record.
Based on your analysis, in which REIT would you invest? Explain why in terms of how it
does or does not meet your investment objectives.
15. Finding real estate stocks. Using Yahoo! Finance or another investor information
Internet (Web) site, find three real estate–related stocks. Evaluate them as potential
additions to your portfolio. Do you think they provide the same degree of diversification as
other forms of real estate investments? Explain.