A mutual fund has 500 shares of General Electric, currently
trading at $16, and 500 shares of Microsoft, Inc., currently
trading at $22. The fund has 1,200 shares outstanding.
a. What is the NAV of the fund? (Round
your answer to 2 decimal places. (e.g., 32.16))
b. If investors expect the price of General
Electric to increase to $18 and the price of Microsoft to decline
to $12 by the end of the year, what is the expected NAV at the end
of the year? (Round your answer to 2 decimal places. (e.g.,
32.16))
c. Assume that the price of General Electric
shares is realized at $18. What is the maximum price to which
Microsoft can decline and still maintain the NAV as estimated in
(a)? (Do not round intermediate calculations. Enter your
answer to the nearest whole number.)
a
Total Fund value = price of GE*Shares of GE + price of MS*Shares of MS |
=16*500+22*500 |
=19000 |
NAV = fund value/shares = 19000/1200=15.83
b
Total Fund value = price of GE*Shares of GE + price of MS*Shares of MS |
=18*500+12*500 |
=15000 |
NAV = fund value/shares = 15000/1200=12.5
c
As both are present with same share number , absolute drop in MS price has to be equal to absolute gain in GE price, there for MS price can drop to 22 - (18-16) =20 for NAV to be not lower than 15.83
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