A mutual fund has 400 shares of General Electric, currently trading at $15, and
ID: 2801567 • Letter: A
Question
A mutual fund has 400 shares of General Electric, currently trading at $15, and 400 shares of Microsoft, Inc., currently trading at $29. The fund has 1,000 shares outstanding.
What is the NAV of the fund? (Round your answer to 2 decimal places. (e.g., 32.16))
If investors expect the price of General Electric to increase to $20 and the price of Microsoft to decline to $14 by the end of the year, what is the expected NAV at the end of the year? (Round your answer to 2 decimal places. (e.g., 32.16))
Assume that the price of General Electric shares is realized at $20. What is the maximum price to which Microsoft can decline and still maintain the NAV as estimated in (a)? (Do not round intermediate calculations.)
A mutual fund has 400 shares of General Electric, currently trading at $15, and 400 shares of Microsoft, Inc., currently trading at $29. The fund has 1,000 shares outstanding.
Explanation / Answer
a.
Total Value of portfolio = (400 × $15) + (400 × $29)
= $6,000 + $11,600
= $17,600.
Total Value of portfolio is $17,600.
Number of stock in portfolio = 1,000
NAV = $17,600 / 1,000
= $17.60.
NAV of stock is $17.60.
b.
Stock of GE increase to $20 and stock of Microsoft decline to $14.
Total Value of portfolio = (400 × $20) + (400 × $14)
= $8,000 + $5,600
= $13,600.
Total Value of portfolio after one year is $13,600.
Number of stock in portfolio = 1,000
NAV after one year = $13,600 / 1,000
= $13.60.
NAV of stock after one year is $13.60.
c.
in part a, NAV of stock is $17.60, so total ortfolio value is $17,600.
$17,600 = (400 × $20) + (400 × stock price of Microsoft)
Stock price of Microsoft = ($17,600 - $8,000) / 400
= $9,600 / 400
= $24.
Maximum price to which Microsoft can decline = $29 - $24
= $5.
Stock decline by $5 and new stock price is $24.
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