EBK INVESTMENTS
11th Edition
ISBN: 9781259357480
Author: Bodie
Publisher: MCGRAW HILL BOOK COMPANY
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Question
Chapter 4, Problem 24PS
Summary Introduction
To think critically about:The important factor which effects the investment decision in case of Bond funds and Equity or Stock funds and the reason behind unmanaged unit investment trusts focusing on the fixed-income market.
Introduction:
Management fees: It is a type of fee payable to a person or company which assists in managing a business activity.
Bond fund: It is also called as debt fund. This sort of funds are funds which are invested in bonds or other securities. They function on the fact of paying periodic dividends to bond holders consisting of interest on securities or any realized capital appreciation.
Equity shares: It is a share which resembles ordinary share in nature but consists of partial or fractional ownership. This is the reason behind the equity shareholders becoming members of the company. Being members, they obtain the right to vote also.
Unit investment trusts: When there is a large amount of money being invested with less different portfolio and it is fixed until the fund is matured, these are called unit investment trusts. These are supposed to be less active in management.
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Students have asked these similar questions
a. You expect a tax-free municipal bond portfolio to provide a rate of return of 4.5%. Management fees of the fund are 0.65%. What
fraction of portfolio income is given up to fees? (Round your answer to 1 decimal place.)
Bond fund
b. If the management fees for an equity fund also are 0.65%, but you expect a portfolio return of 17.0%, what fraction of portfolio
income is given up to fees? (Round your answer to 1 decimal place.)
Equity fund
%
O Bond fund
O Equity fund
%
c. For which fund might management fees be a bigger factor in your investment decision?
As an individual investor, you have three funds to invest into. The first is an equity fund, the second is a corporate bond fund, and the third is a T-bill money-market fund (your risk-free asset).
Fund
Expected rate of return
Risk (Standard deviation)
Equity fund
16%
32%
Corporate bond fund
12%
18%
T-bill money market fund
2%
Correlation between equity fund and bond fund returns is 0.4.
Find the Expected return of the minimum variance portfolio formed from Equity and Bond funds
Consider the following risk-return characteristics for funds A and B:
Expected return
Risk
Fund A (Equity)
12%
20%
Fund B (Debt)
9%
16%
The correlation coefficient between the returns of fund A and fund B is 0.4.
1. Which Fund is riskier? Write 1 if your answer is Fund A, write 2 if your answer is Fund B, or write
3 if your answer is undetermined.
2.1 What is the weight of fund A in the minimum variance portfolio?
2.4 What is the risk of the minimum variance portfolio?
2.2 What is the weight of Fund B in the minimum variance portfolio?
2.3 What is the expected return of the minimum variance portfolio?
Knowledge Booster
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