INVESTMENTS (LOOSELEAF) W/CONNECT
11th Edition
ISBN: 9781260465945
Author: Bodie
Publisher: MCG
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Question
Chapter 4, Problem 3PS
Summary Introduction
To determine:
The reason behind the requirement of keeping cash or cash equivalent securities in case of open end funds, but not in the case of closed end funds.
Introduction:
Open end funds are offered by the fund company directly to investors. The quantity of shares is fixed in case of open end funds. Closed end funds on the other hand, are generally sold in the secondary market and they are not redeemed by the fund manager. Due to such an arrangement the trading of shares might take place at a discount or substantial premium with respect to its NAV.
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Open-end equity mutual funds find it necessary to keep a significant percentage of total investments, typically around 5% of the portfolio, in very liquid money market assets. Closed-end funds do not have to maintain such a position in “cash equivalent” securities. What difference between open-end and closed-end funds might account for their differing policies?
One apparent violation of the Law on One Price is the pervasive discrepancy between the prices and net asset value of closed-end mutual funds. Would you expect to observe greater discrepancies on diversified or less diversified funds? Why?
With respect to hedge fund investing, the net return to an investor in a fund of funds would be lower than that earned from an individual hedge fund because of:a. Both the extra layer of fees and the higher liquidity offered.b. No reason; funds of funds earn returns that are equal to those of individual hedge funds.c. The extra layer of fees only.
Chapter 4 Solutions
INVESTMENTS (LOOSELEAF) W/CONNECT
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