Question

page may not uncon Correctly. Click here to learn more 7. Forecasting mutual fund value Aa Aa Evaluating Mutual Fund Performance When buying a mutual fund, you might expect to earn money through (from dividends), (from increases in share price of the fund's underlying securities), or both. You can calculate your total earnings from a given investment by determining the approximate yield. This value makes it easier to compare investment options. Using Approximate Yield with Mutual Funds The formula for approximate yield of an investment can look intimidating, but it's just a function of three things: (1) dividends earned, (2) capital gains distributions received, and (3) change in share price. Based on the information in the table, compute the approximate yield for each of the two funds that follow. Annual dividends and capital gains distributions Beginning mutual fund share price Ending mutual fund share price Mutual Fund 1 Mutual Fund 2 $0.95 $2.65 $65 $119 $77 $143 The approximate yield for Mutual Fund 1 is and the approximate yield for Mutual Fund 2 is True or False: If both investments carry the same rate of risk, Mutual Fund 1 is a better investment than Mutual Fund 2 O False O True

drop down 1&2-

•future current income

• future capital appreciation

dropdown 3-

• 16.90

• 14.59

• 18.24

• 6.00

dropdown 4-

• 20.34

• 18.24

• 18.32

• 17.29

Answer 1

Part 1:

When buying a mutual fund, you might expect ti earn money through future current income (from dividends), future capital appreciation (from increase in share price of the fund's underlying securities) or both.

Part 2:

Approximate Yield on Mutual Fund is calculated as:
= [Dividend & Capital Gain Distribution + Change in Value of Mutual Fund] / [ (Beginning Price + End Price)/2]

Mutual fund 1:
Approximate Yield on Mutual Fund = [0.95 + (77-65)] / [ (65 + 77)/2]
= 12.95/71
=0.182394366 or 18.24% (Rounded to two decimal places)

Mutual fund 2:
Approximate Yield on Mutual Fund = [2.65 + (143-119)] / [ (143 + 119)/2]
= 26.65/131
=0.203435115 or 20.34% (Rounded to two decimal places)

Part 3: False

For same risk mutual fund 2 will give higher returns and hence mutual fund 1 cannot be better investment.