Question

Choose either Question 1 OR Question 2. If you answer more than 1 question, you will get the mark from the question with lower mark only. The question carries 8.75 marks.

Question 1

A back-end load fund had US$200 million net assets and 10 million shares outstanding at the beginning of 2019. At the end of 2019, there was US$260 million net assets and 12 million shares outstanding. During the year, the fund distributed US0.75 dividend per share.

a. What is / are the difference(s) between front-end and back-end load funds ?

b. If the total expenses on this fund is 2% of the NAV when you sell the fund, calculate the rate of return if you bought the fund at the beginning of 2019 and sold at the end of 2019. Show your calculations clearly. (5.75 marks)

OR,

Question 2

If the risk and return of a two-asset portfolio is given below, calculate the expected return of the portfolio, E(r) and its standard deviation, s. (5.75 marks)  

Then comment on the effectiveness of this portfolio for an investor who is moderately risk-averse.

	Weight in portfolio	Return	Standard Deviation
Asset A	0.55	18%	24%
Asset B	0.45	10%	20%
Correlation coefficient between Assets A and B = 0.25

Answer 1

3. Every investor wants to maximize the investment returns for a given level of risk. Risk refers to the uncertainty of future outcomes. Risk aversion relates to the notion that investors as a rule would rather avoid risk.
In the above question the portfolio is risky for a risk averse investor as the per unit of risk for return is more. The per unit of risk is = Standard Deviation/Expected Return(14.4%/ 17.74). So the per unit of risk is 0.812 which is not worthy for a risk averse investor. The portfolio is not effective for him.