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Question 417  NPV, market efficiency, DDM

A managed fund charges fees based on the amount of money that you keep with them. The fee is 2% of the end-of-year amount, paid at the end of every year.

This fee is charged regardless of whether the fund makes gains or losses on your money.

The fund offers to invest your money in shares which have an expected return of 10% pa before fees.

You are thinking of investing $100,000 in the fund and keeping it there for 40 years when you plan to retire.

How much money do you expect to have in the fund in 40 years? Also, what is the future value of the fees that the fund expects to earn from you? Give both amounts as future values in 40 years. Assume that:

  • The fund has no private information.
  • Markets are weak and semi-strong form efficient.
  • The fund's transaction costs are negligible.
  • The cost and trouble of investing your money in shares by yourself, without the managed fund, is negligible.
  • The fund invests its fees in the same companies as it invests your funds in, but with no fees.

The below answer choices list your expected wealth in 40 years and then the fund's expected wealth in 40 years.




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