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Net asset value, rate of return, and mutual fund investment strategies

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Net Asset Value, Rate of Return, and Mutual Fund Investment Strategies to Diversify Portfolio

Part I:
The net asset value (NAV) of the fund and rate of return to an investor in the fund are the two important concepts of mutual fund investment. Understanding the calculations of NAV and the rate of return are important to make investment decisions in mutual funds and to choose the best mutual fund investment strategies. To calculate NAV and rate of return, you have been provided the following hypothetical information on ProShares UltraShort Silver (ZSL) [http://ca.finance.yahoo.com/q?s=ZSL&ql=1]:

- Market value of assets in the beginning of the year (2011): $200,000,000
- Total liabilities: $10,000,000
- Number of shares outstanding: 17,393,910
- Net asset value (NAV) by the end of the year (2011): $10.94
- Distribution of income and capital gain per share/unit: $0.23

Based on the above information:
i) What was the net asset value (NAV) of the fund in the beginning of the year?
NAV = (Market value of assets - liabilities) / Shares outstanding

ii) What was the rate of return to an investor in the fund?
Rate of Return = (NAV1 - NAV0 + Income and capital gain distributions) / NAV0

Part II:
1. Assume you have set aside a certain amount of money to invest in mutual funds, and are trying to decide how to distribute your investment between actively managed funds and passively managed funds. To do this, you are going to need to do some research on the topic, looking into performance trends, forecasts, individual vs. group capabilities, and a host of other factors. You will also need to know something about the economic climate, prospects for the future, and the state of the market - as well as attend to your own priorities and investment goals and strategies.

2. Based on your analysis and findings, which investment strategy is better (Active or passive)? Which investment strategy would you recommend to other investors? Please explain your reasoning.

3. Based on the rate of return (Part I), would you invest in ProShares UltraShort Silver (ZSL) fund? Please explain your reasoning in brief.

Now look at the current performance (I.e., year to date return) of ProShares UltraShort Silver (ZSL) fund [http://ca.finance.yahoo.com/q?s=ZSL&ql=0 ; http://ca.finance.yahoo.com/q/pm?s=ZSL] and iShares Russell 2000 Index (IWM) [http://ca.finance.yahoo.com/q?s=IWM&ql=1 ; http://ca.finance.yahoo.com/q/pm?s=IWM].

4. Which fund is performing better? Based on the current performance, which professional fund manager is more effective to generate higher rate of return? Is it fund manager of ProShares UltraShort Silver or iShares Russell 2000 Index?

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Solution Preview

Part I:
Given that,
Market value of assets in the beginning of the year (2011)= $200,000,000
Total liabilities= $10,000,000
Number of shares outstanding= 17,393,910
Net asset value (NAV) by the end of the year (2011) = $10.94
Distribution of income and capital gain per share/unit = $0.23

Net asset value (NAV) of the fund in the beginning of the year:
Net asset value (NAV)of the fund in the beginning of the year = ($200,000,000-$10,000,000)/17,393,910 = $10.9234

The rate of return to an investor in the fund:
Rate of return = ($10.94 - $10.9234 + $0.23)/$10.92 = 2.26%

Part II:
There are two types of fund management ...

Solution Summary

The expert examines net asset values, rate of return and mutual fund investment strategies.

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Accounting/Finance Multiple Choice

1) Comprehensive financial information about a company is found in its
A) Corporate by-law (B) 10-K Report (C) Article of incorporation (D) Presidential address

2) You purchase 100 shares of KLM at $40 a share by depositing the minimum amount of margin. If the initial margin requirement was 50% and the maintenance margin requirement is 30% , you will get a margin call if KLM's price falls to:
A)$12 (B) $20 (C) $29 (D)$32

3) One perspective on risk asserts that the longer an investment is held ,the
A) less its risk because its periodic return will be less variable (B) Less it's the risk because its overall return will be higher (C) Greater its risk because its overall return will be lower (D) Greater its risk because its periodic returns will be more variable

4) An investment required rate of return is:
A) The return you expect to receive in the upcoming period(B) Its long-run average return (C) the return require by government regulators(D) the return it must earn to reward investors for the undertaking its inherent risks.

5) An example of a zero -beta asset is:
A) The stock of a rapidly growing Internet company, such as Yahoo!! (B) The stock of a mature company, such as General Motors (C) Treasury bills (D) A thoroughly diversified portfolio of common stock

6)You have just read the annual report of a mutual fund. Its boasted of 26% return and advertised that it had beaten the market return last year by 3% points In doing some research you discover the fund had a beta of + 1.5 and the return on a risk-free treasury securities was 15.0%. Assuming a market risk premium of 8.0% should be used to evaluate performance means that.
A)The fund performance was impressive ; 3% point is significant given the above data(B) The fund performance was good, but not impressive; it beat the market, but only by 1% point not 3(C) The funds performance was no better than what you would expected (D) The fund performance was actually a % point less than what you would have expected

7)Which item below describes a common stock total return?
A) Current return plus current yield (B) Current return plus future return (C) Future yield plus price appreciation (D) current yield plus future earning

8)If ACR's expected total return is 25% and its required rate of return is 20%, you should:
A) Buy the stock (B) Not by the stock (C) Buy the stock, but only if its dividend yield is 5% or greater (D) Current yield plus future earning

9)What item below is not a concern (to most investor) in bond investing
A)Most corporate bonds have redemption values of $1,000(B) Commission and bid-asked spreads can be large(C)Bond price are often volatile(D) Investors must be on guard for a bond called by the issuer

10) With 10% discount rate, the present value factor of $1 received at the end of each of the next 3 years are 0.909,0.826, and 0.751 respectively Given these value of a $1,000 (par) 3-year corporate bond with 8% coupon rate is
A) $949.88 (B) $1,1198.88 (C) $198.88 (D) $751.00

11) The longer the maturity of a bond,
A) The less its price sensitivity (B) The lower its coupon rate (C) the less its price sensitivity and the lower its coupon rate (D) the greater its price sensitivity

12) The difference between a loan fund and a no load fund is that
A) Load fund invest in a variety of securities while a no load fund limit their investments to common stock(B) Loan fund borrow money to increase their portfolio while no load fund do not (C) you buy no-load fund at their net value, but you pay more than net asset value when you buy load funds. (D) No load fund can be purchase anywhere, but loan funds must be purchase through a stockbroker.

13) If you are seeking moderate growth and moderate current return, you should select a
A) loan fund (B) No-load Fund (C)open-end fund (D)Close end fund

14) If you are seeking moderate growth and moderate current returns you should select a
A) Money market fund (B) Income fund (C) Balance return (D) Mixed return

15)The gale market index fund advertise that it earn a 392% return. This is probably its
A)Cumulative total return over some number of years(B) Average annual total return over some years (C) Total return for the previous years (D) Return in relation to overall market

16)The Mark fund has a rate of return of 18% last year. If its Beta weight was +1.5 and if the return on the over all market was 15% its risk adjusted rate of return RAROR is
1)+19.5% (B) -3.0% (C)+ 23.0 (D) +2.0%

17) A unit investment trust differ from a mutual fund in that
A) Its offer a combination of debit and equity securities in the unit (B) Its originator guarantees a redemption price (C) Its original portfolio is generally unchanged until the trust is dissolve (D) It require considerably greater portfolio
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A)I. Treasury strips (B) Coupon Treasury bonds (C) Growth Stocks (D) Medium quality corporate Bonds
An aggressive investor seeking high current income would prefer
A) I (B)II (C) III. (D) IV

19) The best strategy for selecting mutual funds in the 401(K) plan is to
A) Pick an index fund (B) Pick an aggressive growth fund, using last year performance as a guide.(C) Select a number of fund to achieve broad diversification (D) Pick a money market fund to avoid risk

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