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					                    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
               invest with
           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

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