A.

Can Inci

FIN 312 - Investments

Homework 2 - Solutions
Chapter 3.
A.
a. What is your dollar return?
Proceeds from short sale = 250*100 = 25,000
Dividend cost = 5*100 = 500
Transaction costs = 20*2 = 40
Cost of buying back 100 shares after one year = 100*50 = 5,000
Dollar return = (25,000 - 5,000 - 500 - 40) = 19,460
b. What is your total percentage return (TR)? Since Margin is 100%, 25,000 had to go out of
our pocket initially (which we take back when we cover our position. This is considered as
original investment.
TR = 19,460 / 25,000 = 0.7784 = 77.84%
c. What is the Return Relative of this investment (RR)?
RR = 1+TR = 1+0.7784 = 1.7784

Chapter 4.
11. The offering price includes a 6% front-end load, or sales commission, meaning that every
dollar paid results in only $0.94 going toward purchase of shares. Therefore:
Load = (Offer Price – NAV) / Offer Price
0.06 = (X – 10.70) / X
10.70 = 0.94X
X = 10.70 / 0.94 = $11.38
So, Offering price = $11.38

13.
Stock Value held by fund
A $ 7,000,000
B 12,000,000
C 8,000,000
D 15,000,000
Total $42,000,000

Net asset value = = $10.49

14. Value of stocks sold and replaced = $15,000,000

Turnover rate = = 0.3571 = 35.71%

A. Can Inci

22. The excess of purchases over sales must be due to new inflows into the fund. Therefore,
$400 million of stock previously held by the fund was replaced by new holdings. So turnover is:
$400/$2,200 = 0.182 = 18.2%

23. Fees paid to investment managers were: 0.007  $2.2 billion = $15.4 million
Since the total expense ratio was 1.1% and the management fee was 0.7%, we conclude that
0.4% must be for other expenses. Therefore, other administrative expenses were: 0.004  $2.2
billion = $8.8 million

Chapter 5.
A.
Total return for any security consists of an income (yield) component and a capital gain (or loss) component.
• The yield component is dividend (or interest payments) divided by original investment.
• The capital gain (loss) component measures change in the value of the investment divided by
original investment cost. While either component can be zero over a specified time period, only the capital
change component can be negative.

B.
a) The arithmetic mean of return is
[.3148 + (-.0485) + .2037 + .2231 + .0597 + .3106] / 6 = .1772 = 17.72%
b) The geometric mean of return is:
G = (1.3148 x .9515 x 1.2037 x 1.2231 x 1.0597 x 1.3106) 1/6 - 1.0 = (2.558)1/6 - 1.0 = 1.1694 - 1.0 = .1694 or
16.94%
c) The standard deviation is:
_ _
Year R R (R-R) 2
1 0.3148 0.1772 0.0189
2 -0.0485 0.1772 0.0509
3 0.2037 0.1772 0.0007
4 0.2231 0.1772 0.0021
5 0.0597 0.1772 0.0138
6 0.3106 0.1772 0.0178
+_____ +______
1.0634 0.1042
_
{R = 1.0634/6=0.1772}
2 = 0.1042/5 = 0.02084
 = (0.02084)1/2 = 0.1444 or 14.44%
d) CWI = $1(1.3148)(.9515)(1.2037)(1.2231)(1.0597)(1.3106) = $2.558