Question

When buying a mutual fund, you might expect to earn money through (future current income OR future capital appreciation) __________________ (from dividends), (future current income OR future capital appreciation) __________________ (from increases in share prices of the fund's underlying securities), or both. You can calculate your total earnings from a given investment by determining the approximate yield. This value makes it easier to compare investment options.

Using Approximate Yield with Mutual Funds

The formula for approximate yield of an investment can look intimidating, but it's just a function of three things: (1) dividends earned, (2) capital gains distributions received, and (3) change in share price. Based on the information int he table, compute the approximate yield for each of the two funds that follow.

	Mutual Fund 1	Mutual Fund 2
Annual Dividends and Capital Gains Distributions	$1.25	$2.95
Beginning Mutual Fund Share Price	$70	$102
Ending Mutual Fund Share Price	$88	$138

The approximate yield for Mutual Fund 1 is (4.46%, 19.50%, 22.78% OR 24.37%) ____________ .

True of False: If both investments carry the same rate of risk, Mutual Fund 1 is a better investment than Mutual Fund 2. ______________

Answer 1

Approximate Yield on Mutual Fund = [Dividend & Capital Gain Distribution + Change in Value of Mutual Fund] / [ (Begining Price + End Price)/2]

Calculation of Yield for 2 Mutual Funds

Particulars	Mutual Fund 1	Mutual Fund 2
Annual Dividends and Capital Gains Distributions	$1.25	$2.95
Beginning Mutual Fund Share Price	$70	$102
Ending Mutual Fund Share Price	$88	$138
Yield	[$1.25 + ($88 - $70)]/[($88+$70)/2] = 24.37%	[$2.95 + ($138 - $102)]/[($102+$138)/2] = 32.46%

1. Approximate yield of Mutual Fund 1 is 24.37%

2. False, because with same risk Mutual Fund 2 yield higher than Mutual Fund 1