Question

Suppose a mutual fund’s return is 5.1% in the first year, and 1.5% in the second year.

a) Calculate the average annual return of the mutual fund over the two year.

b) Mutual fund investors are trend-chasing, i.e., tend to invest more following good fund performance. Suppose Peter invests $100,000 in the fund in the first year, and $300,000 in the second year (i.e., add $200,000 into the fund). What is the average annual return of every dollar he invests over the two years? Is it higher or lower than your answer in a)?

c) Calculate your answers b) again, if the fund’s first year return is 1.5% and the second year’s return is 5.1% (the person’s investment pattern is unchanged)

Answer 1