Problems Chp. 24

3. Consider the recent performance of the Closed Fund, a closed-end fund devoted to finding

undervalued, thinly traded stocks:

Period NAV Premium/Discount

0 $10.00 0.0%

1 11.25 −5.0

2 9.85 +2.3

3 10.50 −3.2

4 12.30 −7.0

Here, price premiums and discounts are indicated by pluses and minuses, respectively,

and Period 0 represents Closed Fund's initiation date.

a. Calculate the average return per period for an investor who bought 100 shares of the

Closed Fund at the initiation and then sold her position at the end of Period 4.

b. What was the average periodic growth rate in NAV over that same period?

c. Calculate the periodic return for another investor who bought 100 shares of Closed

Fund at the end of Period 1 and sold his position at the end of Period 2.

d. What was the periodic growth rate in NAV between Periods 1 and 2?

4. CMD Asset Management has the following fee structure for clients in its equity fund:

1.00% of first $5 million invested

0.75% of next $5 million invested

0.60% of next $10 million invested

0.40% above $20 million

a. Calculate the annual dollar fees paid by Client 1, who has $27 million under management,

and Client 2, who has $97 million under management.

b. Calculate the fees paid by both clients as a percentage of their assets under management.

c. What is the economic rationale for a fee schedule that declines (in percentage terms)

with increases in assets under management?

Problems Chp. 24

3. Consider the recent performance of the Closed Fund, a closed-end fund devoted to finding

undervalued, thinly traded stocks:

Period NAV Premium/Discount

0 $10.00 0.0%

1 11.25 −5.0

2 9.85 +2.3

3 10.50 −3.2

4 12.30 −7.0

Here, price premiums and discounts are indicated by pluses and minuses, respectively,

and Period 0 represents Closed Fund's initiation date.

a. Calculate the average return per period for an investor who bought 100 shares of the

Closed Fund at the initiation and then sold her position at the end of Period 4.

b. What was the average periodic growth rate in NAV over that same period?

c. Calculate the periodic return for another investor who bought 100 shares of Closed

Fund at the end of Period 1 and sold his position at the end of Period 2.

d. What was the periodic growth rate in NAV between Periods 1 and 2?

4. CMD Asset Management has the following fee structure for clients in its equity fund:

1.00% of first $5 million invested

0.75% of next $5 million invested

0.60% of next $10 million invested

0.40% above $20 million

a. Calculate the annual dollar fees paid by Client 1, who has $27 million under management,

and Client 2, who has $97 million under management.

b. Calculate the fees paid by both clients as a percentage of their assets under management.

c. What is the economic rationale for a fee schedule that declines (in percentage terms)

with increases in assets under management?

Problems Chp. 24

3. Consider the recent performance of the Closed Fund, a closed-end fund devoted to finding

undervalued, thinly traded stocks:

Period NAV Premium/Discount

0 $10.00 0.0%

1 11.25 −5.0

2 9.85 +2.3

3 10.50 −3.2

4 12.30 −7.0

Here, price premiums and discounts are indicated by pluses and minuses, respectively,

and Period 0 represents Closed Fund's initiation date.

a. Calculate the average return per period for an investor who bought 100 shares of the

Closed Fund at the initiation and then sold her position at the end of Period 4.

b. What was the average periodic growth rate in NAV over that same period?

c. Calculate the periodic return for another investor who bought 100 shares of Closed

Fund at the end of Period 1 and sold his position at the end of Period 2.

d. What was the periodic growth rate in NAV between Periods 1 and 2?

4. CMD Asset Management has the following fee structure for clients in its equity fund:

1.00% of first $5 million invested

0.75% of next $5 million invested

0.60% of next $10 million invested

0.40% above $20 million

a. Calculate the annual dollar fees paid by Client 1, who has $27 million under management,

and Client 2, who has $97 million under management.

b. Calculate the fees paid by both clients as a percentage of their assets under management.

c. What is the economic rationale for a fee schedule that declines (in percentage terms)

with increases in assets under management?

Problems Chp. 24

Problems Chp. 24

3. Consider the recent performance of the Closed Fund, a closed-end fund devoted to finding

3. Consider the recent performance of the Closed Fund, a closed-end fund devoted to finding

undervalued, thinly traded stocks:

undervalued, thinly traded stocks:

Period NAV Premium/Discount

Period NAV Premium/Discount

0 $10.00 0.0%

0 $10.00 0.0%

1 11.25 −5.0

1 11.25 −5.0

2 9.85 +2.3

2 9.85 +2.3

3 10.50 −3.2

3 10.50 −3.2

4 12.30 −7.0

4 12.30 −7.0

Here, price premiums and discounts are indicated by pluses and minuses, respectively,

Here, price premiums and discounts are indicated by pluses and minuses, respectively,

and Period 0 represents Closed Fund's initiation date.

and Period 0 represents Closed Fund's initiation date.

a. Calculate the average return per period for an investor who bought 100 shares of the

a. Calculate the average return per period for an investor who bought 100 shares of the

Closed Fund at the initiation and then sold her position at the end of Period 4.

Closed Fund at the initiation and then sold her position at the end of Period 4.

b. What was the average periodic growth rate in NAV over that same period?

b. What was the average periodic growth rate in NAV over that same period?

c. Calculate the periodic return for another investor who bought 100 shares of Closed

c. Calculate the periodic return for another investor who bought 100 shares of Closed

Fund at the end of Period 1 and sold his position at the end of Period 2.

Fund at the end of Period 1 and sold his position at the end of Period 2.

d. What was the periodic growth rate in NAV between Periods 1 and 2?

d. What was the periodic growth rate in NAV between Periods 1 and 2?

4. CMD Asset Management has the following fee structure for clients in its equity fund:

4. CMD Asset Management has the following fee structure for clients in its equity fund:

1.00% of first $5 million invested

1.00% of first $5 million invested

0.75% of next $5 million invested

0.75% of next $5 million invested

0.60% of next $10 million invested

0.60% of next $10 million invested

0.40% above $20 million

0.40% above $20 million

a. Calculate the annual dollar fees paid by Client 1, who has $27 million under management,

a. Calculate the annual dollar fees paid by Client 1, who has $27 million under management,

and Client 2, who has $97 million under management.

and Client 2, who has $97 million under management.

b. Calculate the fees paid by both clients as a percentage of their assets under management.

b. Calculate the fees paid by both clients as a percentage of their assets under management.

c. What is the economic rationale for a fee schedule that declines (in percentage terms)

c. What is the economic rationale for a fee schedule that declines (in percentage terms)

with increases in assets under management?

with increases in assets under management?