Tutorial questions Week 10(1)

TUTORIAL QUESTIONS WEEK 10 FUNDS MANAGEMENT Question 1 The graphs below identify the portfolio composition of three superannuation funds: high growth, balanced and capital stability. Identify which graph relates to each superannuation fund, justifying your answer. Discuss the characteristics of the investors who should invest in each of these three funds. Portfolio A Portfolio B Portfolio C Question 2 The composition of the Fingroup Fund portfolio is as follows: Stock Shares Price A 200,000 $35 B 300,000 40 C 400,000 20 D 600,000 25 The fund has not borrowed any funds, but its accrued management fee with the portfolio manager currently totals $30,000. There are 4 million shares outstanding. What is the net asset value of the fund? Reconsider the Fingroup Fund. If during the year the portfolio manager sells all of the holdings of stock D and replaces it with 200,000 shares of stock E at $50 per share and 200,000 shares of stock F at $25 per share, what is the portfolio turnover rate?
Question 3 Explain how an ETF is created and analyse the advantages and disadvantages of an ETF compared with a mutual fund. Question 4 Corporate Fund started the year with a net asset value of $12.50. By year-end, its NAV equaled $12.10. The fund paid year-end distributions of income and capital gains of $1.50. What was the (pretax) rate of return to an investor in the fund? Question 5 A closed-end fund starts the year with a net asset value of $12.00. By year-end, NAV equals $12.10. At the beginning of the year, the fund was selling at a 2% premium to NAV. By the end of the year, the fund is selling at a 7% discount to NAV. The fund paid year-end distributions of income and capital gains of $1.50. a. What is the rate of return to an investor in the fund during the year? P0: 12*1.02=12.24 P1: 12*0.93=11.26 Return: (P1+1.5-P0)/P0 = -4.3% b. What would have been the rate of return to an investor who held the same securities as the fund manager during the year? P0=$12 P1:$12.10 Return: (P1+$1.5-P0)/P0 = 13% Question 6 How might the incentive fee of a hedge fund affect the manager's proclivity to take on high- risk assets in the portfolio? Question 7 Here are data on three hedge funds. Each fund charges its investors an incentive fee of 20% of total returns. Suppose initially that a fund of funds (FF) manager buys equal amounts of each of these funds, and also charges its investors a 20% incentive fee. For simplicity, assume also that management fees other than incentive fees are zero for all funds. Hedge Fund 1 Hedge Fund 2 Hedge Fund 3 Start of year value (millions) $100 $100 $100 Gross portfolio rate of return 20% 10% 30% a. Compute the rate of return after incentive fees to an investor in the fund of funds. b. Suppose that instead of buying shares in each of the three hedge funds, a stand-alone (SA) hedge fund purchases the same portfolio as the three underlying funds. The total value and
composition of the SA fund is therefore identical to the one that would result from aggregating the three hedge funds. Consider an investor in the SA fund. After paying 20% incentive fees, what would be the value of the investor's portfolio at the end of the year? c. Confirm that the investor's rate of return in SA is higher than in FF by an amount equal to the extra layer of fees charged by the fund of funds
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