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 2.5% 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? Hint: If the turnover rate is 50%, this means that, on average, 50% of the portfolio is sold and replaced with other securities each year. (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 2.5% 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? Hint: If the turnover rate is 50%, this means that, on average, 50% of the portfolio is sold and replaced with other securities each year. (Enter your answer as a percentage rounded to two decimal places.)

Explanation / Answer

Trading costs on the buy orders and sell orders will result in cost of 2.5% value of the trade on each side

so he total return of the portfolio reduced by trading costs=2*50%*2.5%=2.5%

the above is answer..

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