Question

1. a) Many assets trade in more than one type of market. What types of markets do the following   

    trade in?

1. Used Cars
2. Paintings
3. Rare Coins

             b) How do security dealers earn their profits?

             c) Consider a fund with US$100 Million in assets at the start of the year and with 10 Million

Shares outstanding. The fund invests in a Portfolio of Stocks that provides no income but    

increases in value by 10%. The expense Ratio, including 12b- 1 fees, is 1%. What is the Rate of

Return for an investor in the fund?

            d) Identify the factors, in addition to supply and demand relationships, that determine market

                interest rates.

Answer 1

Items	Where they are traded?
Used Car	Dealers markets Direct search markets (advertisement given by sellers in newspapers, websites)
Paintings	Broker market Dealer markets of various art galleries Auction markets
Rare Coins	Dealer markets of coin shops Direct auction Direct search market

Part (b)

Security dealers act as a bridge between sellers and buyers. They earn profits by

1. Commission on sales
2. Spread between bid and ask (Security dealers quote the prices at which they are willing to buy or sell, they buy relatively lower and sale relatively higher, thus earning the spread)
3. Making use of market momentum: They time the market and sell during momentum and buy during lows.

Part (c)

the Rate of Return for an investor in the fund = Value gain - expenses = 10% - 1% = 9%

Part (d)

There are many such factors:

• Inflation
• Exchange rate
• Level of unemployment
• Political and economic stability
• GDP growth rates
• Consumer sentiments and confidence
• Inflation in wages