Suppose that you open a mutual fund account with a deposit of
$540.
5 months later, the fund balance is $610, and you withdraw $192. A
year after the account was opened, your balance is $. If the
dollar-weighted and time-weighted yield rates were the same, what
is the rate of return?
Sol:
Initial deposits = $540 (for 5 months)
Balance after 5 months = $610 - $192 = $418 (for 7 months)
Total weighted amount = $540 x 5/12 and $418 x 7/12
Total weighted amount = $225 and $243.83
Total weighted amount = $225 + $243.83 = $468.83
Therefore balance a year after the account was opened will be $468.83
To determine weighted rate of return is as follows,
Initial deposits = $540 (for first 5 months earnings = 100)
Balance after 5 months = $418 (for 7 months) = 418 x 100/540 = 77.4074
Now earnings for next 7 months will be = 77.4074 x 7/5 = 108.3704
Total 12 months earnings = 5 month earnings + 7 month earnings
Total 12 months earnings = 100 + 108.3704 = 208.3704
Weighted rate of return = Total 12 months earnings / Total weighted amount x 100
Weighted rate of return = 208.3704/468.83 x 100
Weighted rate of return = 44.44%
Therefore rate of return will be 44.44%
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