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WK 11 HW FIN 550






PERIOD                                          NAV                                         PREMIUM/DISCOUNT


0                                                    $ 10.00                                                      0.0%


1                                                       11.25                                                     -5.0


2                                                         9.85                                                     +2.3                         


3                                                        10.50                                                    -3.2


4                                                        12.30                                                    -7.0


Here, price premiums and discounts are indicated by pluses and minuses, respectively, and period 0 represents closed fund’s initiation date.


(a)    Calculate the average return per period for an investor who bought 100 shares of the closed fund at the initiation and then sold her position at the end of period 4


(b)   What was the periodic growth rate in NAV between periods 1 and 2?


PROBLEM 6:  Suppose that at the start of the year, a no-load mutual fund has a net asset value of $ 27.15 per share.  During the year it pays its shareholders a capital gain and dividend distribution of $ 1.12 per share and finishes the year with an NAV of $ 30.34


(a)    What is the return to an investor who holds $ 257.867 shares of this fund in his (non-taxable) retirement account?


(b)   If the investment company allowed the investor to automatically reinvest his cash distribution in additional fund shares, how many additional shares could the investor acquire?  Assume that the distribution can be reinvested at the year-end NAV


PROBLEM 8:  Mutual funds van effectively charge sales fees in one of three ways:  front-end load fees, 12b-1 (i.e., annual) fees, or deferred (i.e., back-end) load fees.  Assume that the SAS fund offers its investors the choice of the following sakes fee arrangements: (1) a 3 percent front-end load, (2) a 0.50 percent annual deduction or (3) a 2 percent back-end load, paid at the liquidation of the investor’s position.  Also assume that SAS fund averages NAV growth of 12 percent per year.


(a)    If you start with $ 100,000 in investment capital, calculate what an investment in SAS would be worth in three years under each of the proposed sales fee schemes.  Which scheme would[CT1] [CT2]  you choose?


(b)   Explain the relationship between the timing of the sales charge and your investment horizon.  In general, if you intend to hold your position for a long time, which fee arrangement would you prefer?


PROBLEM 10:  Peter and Andrea Mueller have built up their $ 600,000 investment portfolio over many years through regular purchases of mutual funds holding only U.S. securities.  Each purchase was based on personal research but without consideration of their other holding. 


They would now like advice on their total portfolio, which follows:


                                                  Type                  MARKET SECTOR              BETA             PERCENT OF TOTAL


Andrea’s comp stocks          Stock                   Small-cap growth              1.40                     35


Blue-chip growth fund         Stock                   Large-cap growth              1.20                    20


Super-beta fund                    Stock                   Small-cap growth              1.60                    10


Conservative fund                Stock                   Large-cap value                  1.05                      2


Index fund                              Stock                  Large-cap index                  1.00                      3 


No-dividend fund                  Stock                 Large-cap growth               1.25                      25


Long-term zero-coupon fund    Bond          Government                                                     5


Evaluate the Mueller’s portfolio in terms of the following criteria:


(a)    Preference for “minimal volatility:


(b)   Asset allocation ( including cash flow needs)                         







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