Chapter 2
19. Consider the three stocks in the following table. P t represents price at time t, and Q t represents shares outstanding at time t. Stock C splits two-for-one in the last period. (LO 2-2)
P0 Q0 P1 Q1 P2 Q2
A 90 100 95 100 95 100
B 50 200 45 200 45 200
C 100 200 110 200 55 400 a. Calculate the rate of return on a price-weighted index of the three stocks for the first period ( t 5 0 to t 5 1). b. What must happen to the divisor for the price-weighted index in year 2? c. Calculate the rate of return of the price-weighted index for the second period ( t 5 1 to t 5 2).

a. At t = 0, the value of the index is: ($90 + $50 + $100)/3 = 80 At t = 1, the value of the index is: ($95 + $45 + $110)/3 =
Assume the rate of return on both funds’ portfolios (before any fees) is 6% per year. How much will an investment in each fund grow to after: (LO 4-5) a. 1 year? b. 3 years? c. 10 years? Assume a hypothetical investment of $100. The end value of the investment will be equal to I × (1 – front-end load) × (1 + r – true expense ratio)T
Loaded-Up
We add the 12b-1 fee to the operating expenses to obtain the true expense ratio: Expense ratio + (12b-1 fee) = 1% + 0.75% = 1.75% a. Year 1 = $100  (1 + 0.06 – 0.0175) = $104.25 b. Year 3 = $100  (1 + 0.06 – 0.0175)3 = $113.30 c. Year 10 = $100  (1 + 0.06 – 0.0175)10 = $151.62

Economy fund a. Year 1 = $100  0.98  (1 + 0.06 – 0.0025) = $103.64 b. Year 3 = $100  0.98  (1 + 0.06 – 0.0025)3 = $115.90 c. Year 10 = $100  0.98  (1 + 0.06 – 0.0025)10 = $171.41

25. The Investments Fund sells Class A shares with a front-end load of 6% and Class B shares with 12b-1 fees of .5% annually as well as back-end load fees that start at 5% and fall by 1% for each full year the investor holds the portfolio (until the fifth year). Assume the portfolio rate of return net of operating expenses is 10% annually. If you plan to sell the fund after four years, are Class A or Class B shares the better choice for you? What if you plan to sell after 15 years? (LO 4-5)
Suppose you have $1000 to invest. The initial investment in Class A shares