Understanding Mutual Funds

Show your work for each problem.

1.
What does a mutual fund do with investors' money?
1. a)Stores it in a vault
2. b)Gives it to the government
3. c)Pools it to buy diversified investments
4. d)Keeps it in a savings account
Answer: Pools it to buy diversified investments
A mutual fund pools money from many investors to buy a diversified portfolio of stocks, bonds, or other securities.
2.
A fund has total assets of 20 million euros and liabilities of 2 million euros with 2 million shares. What is the NAV per share?
Answer: 9
NAV = (20,000,000 - 2,000,000) / 2,000,000 = 18,000,000 / 2,000,000 = 9 euros per share.
3.
What is an expense ratio?
1. a)The number of stocks in the fund
2. b)The minimum investment amount
3. c)The annual fee charged as a percentage of your investment
4. d)The profit you earn from the fund
Answer: The annual fee charged as a percentage of your investment
The expense ratio is the annual fee charged by the fund as a percentage of assets, covering management and administrative costs.
4.
You invest 5,000 euros in a fund with a 2% expense ratio. How much do you pay in annual fees?
Answer: 100
Annual fees = 5,000 × 0.02 = 100 euros.
5.
What is diversification?
1. a)Putting all money in one stock
2. b)Keeping money in cash
3. c)Only investing in bonds
4. d)Spreading investments across different assets to reduce risk
Answer: Spreading investments across different assets to reduce risk
Diversification means spreading investments across different assets (stocks, bonds, sectors) to reduce risk. If one investment loses value, others may gain.
6.
A fund has 80 million euros in assets, 5 million in liabilities, and 5 million shares. Calculate the NAV per share.
Answer: 15
1. What are the total assets (in millions)? 80
2. What are the total liabilities (in millions)? 5
3. Calculate net assets: Assets - Liabilities (in millions) 75
4. Divide net assets by shares: 75 million / 5 million shares 15
7.
You invest 25,000 euros in a fund with a 1.2% expense ratio. How much do you pay in fees per year?
Answer: 300
Annual fees = 25,000 × 0.012 = 300 euros.
8.
Fund A has a NAV of 10 euros and grew 15% last year. Fund B has a NAV of 50 euros and grew 8% last year. Which fund performed better?
1. a)Cannot be determined
2. b)Fund B (higher NAV)
3. c)They performed equally
4. d)Fund A (15% growth)
Answer: Fund A (15% growth)
Fund A performed better with 15% growth vs 8%. The absolute NAV doesn't indicate performance - percentage returns do.
9.
You bought 100 shares at 20 euros each. After a year, the NAV is 23 euros. What is your percentage return?
Answer: 15
1. What was the purchase price per share? 20
2. What is the current NAV per share? 23
3. Calculate the gain per share (new - old) 3
4. Calculate percentage return: (gain / original) × 100 15
10.
How many shares can you buy with 3,000 euros if the NAV is 15 euros per share?
Answer: 200
Shares = 3,000 / 15 = 200 shares.
11.
You bought 150 shares at 40 euros each. After a year, the NAV is 44 euros and you received 1.20 euros dividend per share. What is your total return in euros?
Answer: 780
1. Calculate price gain per share (44 - 40) 4
2. Calculate total price gain (150 shares × 4 euros) 600
3. Calculate total dividends (150 shares × 1.20 euros) 180
4. Calculate total return (price gain + dividends) 780
12.
You invested 10,000 euros. After one year, your investment is worth 11,200 euros. The fund paid 200 euros in dividends. What is your total return percentage?
Answer: 14
1. Calculate capital gain (11,200 - 10,000) 1200
2. What were the dividends received? 200
3. Calculate total gain (capital gain + dividends) 1400
4. Calculate return percentage: (1400 / 10000) × 100 14
13.
A fund charges 0.8% expense ratio. If you invest 50,000 euros for 5 years (with no growth), how much total do you pay in fees?
Answer: 2000
Annual fee = 50,000 × 0.008 = 400 euros. Over 5 years = 400 × 5 = 2,000 euros in total fees.
14.
Fund X has expense ratio 0.1% and returned 9.5% last year. Fund Y has expense ratio 1.5% and returned 10.5% last year. After expenses, which had higher net return?
1. a)Fund X (9.4% net return)
2. b)Fund Y (9.0% net return)
3. c)They had equal net returns
4. d)Cannot be determined
Answer: Fund X (9.4% net return)
Fund X net return = 9.5% - 0.1% = 9.4%. Fund Y net return = 10.5% - 1.5% = 9.0%. Fund X has higher net return despite lower gross return.
15.
A fund's NAV was 25 euros at the start of the year and 30 euros at the end. It paid 1 euro dividend per share. What is the total return percentage?
Answer: 24
1. Calculate price gain per share (30 - 25) 5
2. What was the dividend per share? 1
3. Calculate total gain per share (price gain + dividend) 6
4. Calculate return percentage: (6 / 25) × 100 24
16.
An index fund charges 0.05% expense ratio. An actively managed fund charges 1.25%. On a 100,000 euro investment, how much more do you pay in annual fees with the active fund?
Answer: 1200
Index fund: 100,000 × 0.0005 = 50 euros. Active fund: 100,000 × 0.0125 = 1,250 euros. Difference = 1,250 - 50 = 1,200 euros more per year.
17.
A fund has assets of 120 million euros and 8 million shares. If the fund receives 10 million euros in new investments and issues 500,000 new shares, what is the new NAV?
Answer: 15.29
1. What is the original NAV? (120 million / 8 million shares) 15
2. What are the new total assets? (120 + 10 million) 130
3. What is the new total shares? (8 + 0.5 million) 8.5
4. Calculate new NAV: 130 / 8.5 (round to 2 decimals) 15.29