ANSWERS TO END-OF-CHAPTER QUESTIONS
How can the pricing of closed-end funds possibly indicate that market inefficiencies
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
The price per share of a closed-end funds is often below the NAV per share.
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
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.
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)?
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)
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: