Suppose that every time a fund manager trades stock, transaction costs such as c

Question

Suppose that every time a fund manager trades stock, transaction costs such as commissions and bid–ask spreads amount to 1.9% of the value of the trade. If the portfolio turnover rate is 50%, by how much is the total return of the portfolio reduced by trading costs? (Enter your answer as a percentage rounded to two decimal places.)

Suppose that every time a fund manager trades stock, transaction costs such as commissions and bid–ask spreads amount to 1.9% of the value of the trade. If the portfolio turnover rate is 50%, by how much is the total return of the portfolio reduced by trading costs? (Enter your answer as a percentage rounded to two decimal places.)

Explanation / Answer

Well , I would like to answer by giving an Example:

Let us take the value of the portfolio invested be Rs.100 and it is given that the return from the portfolio is 50%. Therefore the total value of the portfolio would be Rs. 100+(100*50%)= Rs.150 . The transaction cost is 1.9 % which would be 100*1.9%=Rs.1.9. Therefore if you calculate the total value of the portfolio without deducting the transaction cost is Rs. 150 which is 50 % return effectively. But if the transaction cost is applied and deducted then the total return would be 150-1.9= 148.1 which clearly shows that the total return of the portfolio would reduced by 1.9 % effectively.

Thank you

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