Question

# You are evaluating a closed-end mutual fund and see that its price is different from its...

You are evaluating a closed-end mutual fund and see that its price is different from its net asset value (NAV). The fund has an expense ratio (ε) of 3.23% and a dividend yield (δ) of 4.00%. The fund has experienced a risk-adjusted abnormal return (α) of 2.81%.

By what amount (premium or discount) is the fund likely to trade relative to its NAV? (Round your answer to 2 decimal places. Use a negative sign to indicate a discount.)

I have answered the question below

Please up vote for the same and thanks!!!

Do reach out in the comments for any queries

As the expense ratio is greater than the risk-adjusted abnormal return, the bond will sell at a discount. The amount of discount can be determined with the use of following formula:

Amount of Discount = (Risk-Adjusted Abnormal Return - Expense Ratio)/(Dividend Yield + Expense Ratio - Risk-Adjusted Abnormal Return)

Using the values provided in the question in the above formula, we get,

Amount of Discount = (2.81% - 3.23%)/(4% + 3.23% - 2.81%) = -9.50% (the negative sign indicates discount)

#### Earn Coins

Coins can be redeemed for fabulous gifts.