Mutual Fund Rate of Return. The following table shows the...

Mutual Fund Rate of Return. The following table shows the total return and the number of funds for four categories of mutual funds. $$ \begin{array}{lcc} \text { Type of Fund } & \text { Number of Funds } & \text { Total Return (\%) } \\ \text { Domestic Equity } & 9191 & 4.65 \\ \text { International Equity } & 2621 & 18.15 \\ \text { Specialty Stock } & 1419 & 11.36 \\ \text { Hybrid } & 2900 & 6.75 \end{array} $$. a. Using the number of funds as weights, compute the weighted average total return for these mutual funds. b. Is there any difficulty associated with using the "number of funds" as the weights in computing the weighted average total return in part (a)? Discuss. What else might be used for weights? c. Suppose you invested 10,000 dollar in this group of mutual funds and diversified the investment by placing 2,000 dollar in Domestic Equity funds,4,000 dollar in International Equity funds, 3,000 dollar in Specialty Stock funds, and $\$ 1,000$ in Hybrid funds. What is the expected return on the portfolio?

Mutual Fund Rate of Return. The following table shows the total return and the number of funds for four categories of mutual funds.
$$
\begin{array}{lcc}
\text { Type of Fund } & \text { Number of Funds } & \text { Total Return (\%) } \\
\text { Domestic Equity } & 9191 & 4.65 \\
\text { International Equity } & 2621 & 18.15 \\
\text { Specialty Stock } & 1419 & 11.36 \\
\text { Hybrid } & 2900 & 6.75
\end{array}
$$.
a. Using the number of funds as weights, compute the weighted average total return for these mutual funds.
b. Is there any difficulty associated with using the "number of funds" as the weights in computing the weighted average total return in part (a)? Discuss. What else might be used for weights?
c. Suppose you invested 10,000 dollar in this group of mutual funds and diversified the investment by placing 2,000 dollar in Domestic Equity funds,4,000 dollar in International Equity funds, 3,000 dollar in Specialty Stock funds, and $\$ 1,000$ in Hybrid funds. What is the expected return on the portfolio?

Key Concepts

Expected Portfolio Return

The expected portfolio return is computed as the sum of the products of the weight (or allocation) of each investment category and its respective expected return. This calculation is important for investors to assess the anticipated performance of their diversified investments, allowing for a more informed decision-making process regarding risk and allocation strategies.

Investment Portfolio Diversification

Investment portfolio diversification involves spreading investments across a variety of asset classes or investment categories to reduce risk. The idea is to limit exposure to any single asset or group by allocating investment dollars among diverse categories, which can lead to a more stable and potentially better-performing overall portfolio.

Weighted Average

A weighted average is a method of calculating a central value by multiplying each component by its associated weight and then summing the resulting products. In finance, it is often used to summarize the overall return or risk of a portfolio by accounting for the relative significance of each investment or group of investments in the total allocation.

Weights in Financial Calculations

Weights represent the relative importance, contribution, or size of each component in the calculation of a weighted average. In investment analysis, selecting appropriate weights is crucial because they determine how much each component influences the overall result. Using the number of funds as weights might not reflect the actual capital distribution in the market, and alternative weights such as the amount of assets under management or dollar investments might provide a more accurate measure.

Transcript

Please give Ace some feedback