Consider a mutual fund with $750 million in assets at the start of the year and
ID: 2795379 • Letter: C
Question
Consider a mutual fund with $750 million in assets at the start of the year and 10 million shares outstanding. The fund invests in a portfolio of stocks that provides dividend income at the end of the year of $0.20 per share. The stocks included in the fund's portfolio increase in price by 7%, but no securities are sold and there are no capital gains distributions. The fund charges 12b-1 fees of .75%, which are deducted from portfolio assets at year-end. What is the rate of return for an investor in the fund at the end of the year?
Explanation / Answer
NAV0 = $750,000,000/ 10,000,000
NAV0 = $75
Dividends per share = $0.20
NAV1 is based on the 7% price gain, less the 0.75% 12b - 1 fee:
NAV1 = $75 * 1.07 * (1 - 0.0075)
NAV1 = $79.64813
Rate of return = (79.64813 - 75 - 0.20)/ 75
Rate of return = 5.93%
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