Question

Consider the recent performance of the Closed Fund, a closed-end fund devoted to finding undervalued, thinly traded stocks Premium/Discount Period NAV 0 $10.10 0.0% -5.4 1 11.40 2 10.10 +2,4 10.75 3 -2.9 12.30 -6.6 Here, price premiums and discounts are indicated by pluses and minuses, respectively, and Period 0 represents Closed Fund's initiation date. Do not round intermediate calculations. Round your answers to two decimal places. Use a minus sign to enter negative values, if any a. Calculate the average return (geometric average) per period for an investor who bought 100 shares of the Closed Fund at the initiation and then sold her position at the end of Period 4 % b. What was the average periodic growth rate in NAV over that same period? c. Calculate the periodic return for another investor who bought 100 shares of Closed Fund at the end of Period 1 and sold his position at the end of Period 2. d. What was the periodic growth rate in NAV between Periods 1 and 2?

Answer 1

Solution :-

(A)

Closing NAV = $12.30

Closing NAV (after discount) = $12.30*( 1 - 0.066) = $11.488

Purchase NAV Price = $10.10

Now Return = ($11.488 - $10.10) / $10.10 = 0.13744 = 13.744%

(B)

Closing NAV = $12.30

Opening NAV = $10.10

Now Growth rate in NAV from year 0 to 4 = ( $12.30 - $10.10 ) / $10.10 = $2.20 / $10.10 = 21.78% of 4 years

While 21.78% / 4 = 5.44%

(C)

Purchase Price at the end of year 1 = $11.40 less (5.4%) = $11.40 - $0.6156 = $10.784

Selling Price at the end of Year 2 = $10.10 add (2.4%) = $10.10 + $0.2424 = $10.343

Periodic return = [ ($10.343 - $10.784) / $10.784 ] = -4.099%

Return = ($10.343 - $10.784)*100 Shares = -$44.2

(D)

Growth Rate = ( $10.10 - $11.40 ) / $11.40 = 0.11404 = 11.404%