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## Morningstar tracks the total return for a large number of mutual funds. The following table shows the total return and the number of f

Question

Morningstar tracks the total return for a large number of mutual funds. The following table

shows the total return and the number of funds for four categories of mutual funds

(Morningstar Funds500, 2008).

Type of Fund

Domestic Equity

International Equity

Specialty Stock

Hybrid Number of Funds

9191

2621

1419

2900

Total Return (%)

4.65

18.15

11.36

6.75

a. Using the number of funds as weights, compute the weighted average total return for

the mutual funds covered by Morningstar.

b. Is there any difficulty associated with using the “number of funds” as the weights in

computing the weighted average total return for Morningstar in part (a)? Discuss. What

else might be used for weights?

c. Suppose you had invested $10,000 in mutual funds at the beginning of 2007 and

diversified the investment by placing $2000 in Domestic Equity funds, $4000 in International Equity funds, $3000 in Specialty Stock funds, and $1000 in Hybrid

funds. What is the expected return on the portfolio?

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Mathematics
3 years
2021-09-05T11:20:41+00:00
2021-09-05T11:20:41+00:00 1 Answers
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## Answers ( )

Answer:

Kindly check explanation

Step-by-step explanation:

Given the following :

Type of Fund___No of fund(a) __total return%(b)

Domestic Equity____9191________4.65

International Equity__2621_______18.15

Specialty Stock______1419______11.36

Hybrid____________2900______6.75

A) weighted average :

Σa.b /Σa = (9191 * 4.65) + (2621 * 18.15) + (1419 * 11.36) + (2900 * 6.75) / (9191 + 2612 + 1419 + 2900)

= 126004.14 / 16122

= 7.8156643

B) Using the number of funds as weight poses a difficulty as it considers the cost of funds rater than it’s value. Hence, the higher the cost, the higher the return. Value of funds would have been a better weight parameter.

C) c. Suppose you had invested $10,000 in mutual funds at the beginning of 2007 and

diversified the investment by placing $2000 in Domestic Equity funds, $4000 in International Equity funds, $3000 in Specialty Stock funds, and $1000 in Hybrid

funds. What is the expected return on the portfolio?

Expected return = Σ (p)*(x)

= (2000*4.65) + (4000*18.15) + (3000*11.36) + (1000*6.75) = $122,730