sm25 - CHAPTER 25 PROFESSIONAL ASSET MANAGEMENT Answers to...

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CHAPTER 25 PROFESSIONAL ASSET MANAGEMENT Answers to Questions 1. Private management and advisory firms typically develop a personal relationship with their clients, getting to know the specific investment objectives and constraints of each. The collection of assets held can then be tailored to the special needs of the client. Conversely, a mutual fund offers a general solution to an investment problem and then markets that portfolio to investors who might fit that profile. Special attention comes at a cost and for that reason private management firms are used mainly by investors with substantial levels of capital, such as pension funds and high net worth individuals. Conversely, individual investors with relatively small pools of capital are the primary clients of investment companies. The majority of private management and advisory firms are still much smaller and more narrowly focused on a particular niche in the market. A wide variety of funds is available, so an investor can match almost any investment objective or combination of investment objectives. Management and advisory firms hold the assets of both individual and institutional investors in separate accounts, which allows for the possibility of managing each client’s portfolio in a unique manner. Conversely, investment companies are pools of assets that are managed collectively. Investors in these funds receive shares representing their proportional ownership in the underlying portfolio of stocks, bonds, or other securities. 2. Based upon Exhibit 25.2, there has been a rapid increase in the number of large asset management firms. Much of this asset growth can be explained by the strong performance of the U.S. equity markets during this period, but there has been a trend toward consolidating assets under management in large, multiproduct firms. Still, as of December 2001, there were 48 firms with AUM of at least $100 billion. 3. After the initial public sale of shares in the investment company the open-end fund will continue to sell new shares to the public at the NAV with or without a sales charge and will redeem (buy back) shares of the fund at the NAV. In contrast, the closed-end fund does not buy or sell shares once the original issue is sold. Therefore, the purchase price or sales price for a closed-end fund is determined in the secondary market. 4. A load fund charges a fee for the sale of shares (front end load) and/or redeeming shares (back end load). It will sell shares at its net asset value plus the sales charge. A no-load 25 - 1
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fund has no initial sales charge, so it will sell its shares at its net asset value. 5. You definitely should care about how well a mutual fund is diversified. One of the major advantages of a mutual fund is instant diversification, so it truly is important. Given the CAPM, it is known that the market only pays for systematic risk so it is important to eliminate unsystematic risk, which is the purpose of diversification. A portfolio that is
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