Homework 6: Mutual Funds and Hedge Funds
BM 410 Investments
Homework 6: Understand Chapter 4
1. Using Morningstar to research mutual funds (use teaching tool 07A [TT07A] for help
on accessing Morningstar from the HBLL).
Suppose you want to find a fund to broaden and deepen your portfolio (Diversify:
Broaden and Deepen). You have decided that an international open-end mutual
fund (invest low cost) with total fees and expenses of less than 50 basis points
(invest low cost), with a minimum initial investment of $3,000 or less would be
good, and with turnover, since this will be in your taxable account, of less than
25% (invest tax efficiently). Also you are concerned for economies of scale, so
you only want mutual funds which have assets greater than $1 billion. You
determine the criteria below:
Fund Category = International Stock OK
Fees & Expenses And No-load Funds = Yes OK
Fees & Expenses And Expense ratio <= Value .50 OK
Closed to New Invest. And Closed to New Investments = No OK
Minimum Purchase And Min. Initial Investments <= 3000 OK
Turnover Ratio And Turnover ratio <= Value <= 25 OK
Fund Size And Fund Size (Total Assets in $MM) >= 1000 OK
Assuming you want a fund that covers overall international markets (not
including the US) and not just the pacific region, Japan, Europe, or emerging
markets, two funds fit your criteria. Answer the following about each fund.
a. What is the fund symbol _VDMIX__ __VGTSX__.
b. What is the asset size _1,547____ ___10,809___.
c. What type is the style box _Large blend_ _Large blend.
d. How much cash do they have _0.5_______ __0.4______.
e. What is their annual turnover __4%_______ ___3%_____.
2. Consider a mutual fund with $200 million in assets at the start of the year and with 10
million shares outstanding. The fund invests in a portfolio of stocks that provides
dividend income at the end of the user of $2 million. The stocks included in the
fund’s portfolio increase in price by 8%, but no securities are sold, and there are no
capital gains distributions. The fund charges 12b-1 fees of 1%, which are deducted
from portfolio assets at year-end. What is net asset value at the start and end of the
year? What is the rate of return for an investor in the fund?
Start of year NAV = $20
Dividends per share = $0.20
End of year NAV is based on the 8% price gain, less the 1% 12b-1 fee:
End of year NAV = $20 (1.08) (1 – 0.01) = $21.384
$21.384 $20 $0.20
Rate of return = = 0.0792 = 7.92%
3. What is the new investor bias in relation to mutual funds?
New investors bring new money to the fund and cause the funds to grow.
Accommodating the new growth requires that additional transaction fees are
needed. These fees are subsidized by existing investors.
4. What are the major types of Mutual Funds? What are they comprised of?
Money Market – comprised of liquid assets such as government bills or
commercial paper (bonds)
Stocks – comprised of common stocks of traded companies
Bonds – comprised of corporate, government, and municipal bonds
Index – comprised to match specific bench marks
RIET – comprised of real-estate investments
5. What basic principles should you follow when buying securities?
1. Know yourself
2. Understand risk
3. Stay Diversified
4. Invest Low Cost and tax-efficiently
5. Invest long-term
6. If you invest in individual assets, know what you invest in and who you
7. Monitor portfolio performance
8. Don’t spend too much time, money, and energy trying to “Beat the
9. Invest only with high quality, licensed, and reputable people and
10. Develop a good investment plan consistent with your goals, budget, and
these principles, and follow it closely