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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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