# Section 8 - ECON 136: Financial Economics Section 8 (Oct...

This preview shows pages 1–3. Sign up to view the full content.

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: ECON 136: Financial Economics Section 8 (Oct 23rd) Xing Huang 1 Economics Department, UC Berkeley 1 Mutual Fund Fees Example Find the e/ective annual return to investors for a 2 year investment of \$10,000 in the two Treasury bond mutual funds. Assume the return on the portfolio of bonds held by both funds is 2.8% per year. Fee Structure: Merrill ST US Govt A Fund (MDUGX) Vanguard ST Fed Inv Fund (VSGBX) Expense Ratio 0.88% 0.20% Front Load 3.50% 0.00% Deferred Load 0.00% 0.00% ans: For Merrill you pay \$350 up front and thus earn returns on \$9,650. So you end up with, \$9 ; 659 & (1 + 0 : 028 ¡ : 088) 2 = \$9 ; 659 & (1 : 0192) 2 = \$10 ; 024 : 12 R ann = & \$10 ; 024 : 12 \$10 ; 000 ¡ 1 = 2 ¡ 1 = 0 : 12% ans: For Vanguard you pay \$0 up front and thus earn returns on all \$10,000. So you end up with, \$10 ; 000 & (1 + 0 : 028 ¡ : 002) 2 = \$10 ; 000 & (1 : 026) 2 = \$10 ; 526 : 76 R ann = & \$10 ; 526 : 76 \$10 ; 000 ¡ 1 = 2 ¡ 1 = 2 : 60% 2 E¢ cient Markets Hypothesis 2.1 Review ¢ What the EMH does and does not say 1) The EMH DOES NOT say that investors cannot earn high expected returns (high ex- pected returns are normal for &nancial assets whose payo/s are very risky). 2) The EMH DOES NOT say that investors cannot ever get lucky and earn higher returns 1 These notes are enormously bene&ted from previous GSIs: Keith Jacks Gamble, Dan Hartley and Congyan Tan. Thank you all very much !! 1 than were expected (this is perfectly natural with uncertainty). 3) The EMH DOES say that investors cannot expect to be lucky; they cannot expect to earn a higher return than is normal compensation for the risk of holding that asset. & Three forms: 1) Weak form of the EMH Stock prices immediately incorporate all information contained in past prices and returns. 2) Semi-strong form of the EMH Stock prices immediately incorporate all publicly available information (such as prices, earn- ings forecasts, and published facts about the &rm¡s business operations) 3) Strong form of the EMH Stock prices immediately incorporate all publicly and privately available information (includ- ing information held only by insiders)....
View Full Document

## This note was uploaded on 01/25/2010 for the course ECON 136 taught by Professor Szeidl during the Fall '08 term at University of California, Berkeley.

### Page1 / 5

Section 8 - ECON 136: Financial Economics Section 8 (Oct...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online