Question

(i) You invest $135 in a mutual fund that grows 12 percent annually for three years. Then the fund experiences an exceptionally bad year and declines by 25 percent. After the bad year, the fund resumes its 12 percent annual return for the next three years.

a. What is the average percentage change for the seven years?

b. If you liquidate the fund after nine years, how much do you receive?

c. What is the annualized return on this investment using a dollar-weighted calculation and using a time-weighted calculation?

PLEASE SHOW WORK

Answer 1

A)

YEAR 1	12%
YEAR 2	12%
YEAR 3	12%
YEAR 4	-25%
YEAR 5	12%
YEAR 6	12%
YEAR 7	12%
TOTAL RETURN	47%
NO. OF YEARS	7
AVERAGE RETURN	6.71%

average return = total return/no. of years

B) based on the average return if someone liquidate the fund after 9 years

value of fund=(9 years x average return x amount invested) + amount invested

= (9 x 6.71% x 135)+135

=81.53+135

= 216.53

C) dollar weighted calculation-using financial calculator

PV=135 FV=216.53 N=9 PMT=0

I/Y dollar weighted return = 5.39%

time weighted return=(value of money after 9 years - value of money at inititaion)/value of money at initiation

=216.53-135/135

=60.39%

answered by: anonymous