Type of Fund Domestic Equity International Equity Specialty Stock Hybrid Number
ID: 3306760 • Letter: T
Question
Type of Fund Domestic Equity International Equity Specialty Stock Hybrid Number of Funds 9191 2621 1419 2900 Total Return(%) 4.65 18.15 11.36 6.75 a. Using the number of funds as weights, compute the weighted average total return for these mutual funds. (to 2 decimals) b. Is there any difficulty associated with using the "number of funds" as the weights in computing the weighted average total return in part (a)? Discuss. What else might be used for weights? The input in the box below will not be graded, but may be reviewed and considered by your instructor blank c. Suppose you invested $10,000 in this group of mutual funds and diversified the investment by placing $2000 in Domestic Equity funds, $4000 in International Equity funds $3000 in Specialty Stock funds, and $1000 in Hybrid funds. What is the expected return on the portfolio? (to 2 decimals)Explanation / Answer
(a) Given, number of funds = 9191, 2621, 1419, 2900. These are the weights to be used in calculated weighted average total return.
Given, total return %s = 4.65, 18.15, 11.36, 6.75
Weighted average Total Return % = 7.81% (approx.)
(c) Amount invested in Domestic Equity funds = $2000
Total Return % = 4.65%
Expected value of Domestic Equity funds = (1 + (4.65/100)) * 2000 = $2093
Amount invested in International Equity funds = $4000
Total Return % = 18.15%
Expected value of International Equity funds = (1 + (18.15/100)) * 4000 = $4726
Amount invested in Specialty Stock funds = $3000
Total Return % = 11.36%
Expected value of Specialty Stock funds = (1 + (11.36/100)) * 3000 = $3340.80
Amount invested in Hybrid funds = $1000
Total Return % = 6.75%
Expected value of Hybrid funds = (1 + (6.75/100)) * 1000 = $1067.50
Expected value of portfolio = $(2093 + 4726 + 3340.80 + 1067.50) = $11227.30
Expected return on the portfolio = ((11227.30 - 10000)/10000) * 100 = 12.27% (approx)
(b) To calculate the weighted average total return, it may not be wise to use the "number of funds" as the weights, because the total return %s that are calculated here have been calculated using the prices of the shares.
The formula for calculating a fund's return% is generally given by :
(Expected value of fund - Original value of fund) / Original value of fund * 100
So, it may be wrong to use the "number of funds" figures in our weighted average calculation.
We may use the initial values that we have invested in those funds for calculating the weighted average total return, instead of using the "number of funds" values.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.