Chapter 4 – Mutual Funds and Other Investment Companies
CHAPTER 4: MUTUAL FUNDS AND OTHER INVESTMENT
COMPANIES
PROBLEM SETS
1. The unit investment trust should have lower operating expenses. Because the
investment trust portfolio is fixed once the trust is established, it does not have to
2. a. Unit investment trusts: Diversification from large-scale investing, lower
transaction costs associated with large-scale trading, low management fees,
predictable portfolio composition, guaranteed low portfolio turnover rate.
3. Open-end funds are obligated to redeem investor’s shares at net asset value and thus
must keep cash or cash-equivalent securities on hand in order to meet potential
4. Balanced funds keep relatively stable proportions of funds invested in each asset
class. They are meant as convenient instruments to provide participation in a range
of asset classes. Life-cycle funds are balanced funds whose asset mix generally
Chapter 4 – Mutual Funds and Other Investment Companies
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5. Unlike an open-end fund, in which underlying shares are redeemed when the fund
6. Advantages of an ETF over a mutual fund:
to individual small investors. This implies lower management fees.
Disadvantages of an ETF over a mutual fund:
7. The offering price includes a 6% front-end load, or sales commission, meaning that
every dollar paid results in only $0.94 going toward purchase of shares. Therefore:
9. Stock Value Held by Fund
A $ 7,000,000
B 12,000,000
10. Value of stocks sold and replaced = $15,000,000
Chapter 4 – Mutual Funds and Other Investment Companies
12.
b. An investor holding the same securities as the fund manager would have
earned a rate of return based on the increase in the NAV of the portfolio:
10
0
NAV NAV Distributions $12.10 $12.00 $1.50 0.133, or 13.3%
NAV $12.00
−+ −+
==
14. a. Empirical research indicates that past performance of mutual funds is not
highly predictive of future performance, especially for better-performing
15. NAV0 = $200,000,000/10,000,000 = $20
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16. The excess of purchases over sales must be due to new inflows into the fund.
17. Fees paid to investment managers were: 0.007 $2.2 billion = $15.4 million
18. As an initial approximation, your return equals the return on the shares minus the
total of the expense ratio and purchase costs: 12% − 1.2% − 4% = 6.8%.
19.
Assume $1,000 investment
Loaded-Up Fund
Economy Fund
Yearly growth (r is 6%)
(1 .01 .0075)r+ − −
(.98) (1 .0025)r + −
20. a.
$450,000,000 $10,000000 $10
44,000,000
−=
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21. Suppose you have $1,000 to invest. The initial investment in Class A shares is $940
net of the front-end load. After four years, your portfolio will be worth:
22. a. After two years, each dollar invested in a fund with a 4% load and a portfolio
return equal to r will grow to: $0.96 (1 + r – 0.005)2.
Each dollar invested in the bank CD will grow to: $1 1.062.
b. If you invest for six years, then the portfolio return must satisfy:
Chapter 4 – Mutual Funds and Other Investment Companies
23. The turnover rate is 50%. This means that, on average, 50% of the portfolio is sold
and replaced with other securities each year. Trading costs on the sell orders are
24. For the bond fund, the fraction of portfolio income given up to fees is:
Fees are a much higher fraction of expected earnings for the bond fund and
therefore may be a more important factor in selecting the bond fund.
25. Suppose that finishing in the top half of all portfolio managers is purely luck, and
that the probability of doing so in any year is exactly ½. Then the probability that