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1 CHAPTER 20 INVESTMENT COMPANIES ANSWERS TO END-OF-CHAPTER QUESTIONS 1. How can the pricing of closed-end funds possibly indicate that market inefficiencies exist? What are the pros and cons of that argument? If market inefficiencies exist, how can they be exploited to make money? Explain, and think of any possible problems that might occur. The price per share of a closed-end funds is often below the NAV per share. With little or no inefficiencies, the price per share should equal the NAV. Alas, there are factors associated with the fund manager performance, operating efficiencies, unrealized taxes, etc. that provide “real value discount” arguments. Most pricing differential would have been “closed” by hedge fund investors. Since the discount persists, real discount factors must exist. 2. What type of fund would you want to buy if you believed that stock markets were always fully and completely efficient? Explain why. Why do you think people don’t all buy the same kinds of funds? If the market were efficient, no one mutual fund, and its fund manager, could beat the market over the long term. In that case, buy the market via an index fund, which should also have low trading expenses. Keep the expenses down and buy the market. 3. If you invested $10,000 in a mutual fund that charged a 1 percent of net assets management advisory fee and a 1 percent 12b-1 fee, and the fund matched the stock market’s return of 10 percent per year for 10 years, who much would your shares in the fund be worth at the end of that time (assuming no taxes, all income net of fees was reinvested at year end, and that all fund charges were levied at the end of the year)? With Fees : Assuming the one percent advisory fee and 12b-1 fee were taken one at a time, Value at the end of the first year (pre-expenses) = $10,000 (1.10) 1 = $11,000 Value at the end of the first year (post-expenses) = $11,000(0.99)(0.99) = $10,781.11. At the end of the tenth year one will have accumulated:
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This note was uploaded on 11/08/2011 for the course MAT/FIN 272 taught by Professor Burns during the Spring '11 term at Central Connecticut State University.

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