Author Question: Suppose that a mutual fund, Washington Peak Strategic Bond Fund, believes it has hit upon a winning ... (Read 51 times)

nummyann · **on:** Jun 29, 2018

Suppose that a mutual fund, Washington Peak Strategic Bond Fund, believes it has hit upon a winning investment strategy.The fund uses an active management strategy to try to outperform the bond market.

According to Washington Peak's prospectus, investors need to pay fees of 2 percent annually.Based on the historical success of their active investment strategy, the strategy is projected to generate annual returns (once fees are paid) of 8 percent. A friend of yours is considering investing in Washington Peak and asks you for investment advice. What would you suggest?

Question 2

A decrease in the demand for chocolate with no change in supply will create a ________ of chocolate at today's price, but gradually the price will ________.

A. surplus; fall
B. shortage; fall
C. surplus; rise
D. shortage; rise

hanadaa · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

One of the problems with Washington Peak's investment strategy is the lack of diversification. By investing most of the fund's money in one investment strategy, Peak will not be able to diversify its returns. It should therefore not be a large fraction of your friend's total investment portfolio.Second, Peak's traders base their strategy on historical data. It is not necessarily the case that historical trends will continue to play out in the future. This fact introduces some additional risk.The third factor that your friend will need to consider is the expense ratio that Washington Peak is charging. An expense ratio of 2 percent is generally considered to be very high for a mutual fund. High expense ratios lower the net annual return that your friend receives on his investment.
A-head:RISKY RETURNS; DIVERSIFICATION; INVESTMENT ACCOUNTS
Concept: Diversification, expense ratios

Answer to Question 2

A Figure 4.11(b) on page 100 illustrates this case of a decrease in demand.