1 Using the data below calculate the rates of return
1. Using the data below, calculate the rates of return for each fund for 2006 and 2007. Your figures for 2007 should agree with the values given in Case. Calculate the average rate of return for the two-year period for each fund.
2. Show how much their $3,000 investment would be worth as of December 31, 2007, assuming it was invested in one or the other fund. Assume that distributions during the year were used to acquire additional shares at the average NAV for the year.
3. Assuming that each fund is no-load and that the two funds are similar in other important respects, which do you recommend for the Byrons? Explain the reason(s) for your choice. Be sure to comment on the issue of distributions from the funds.
4. Explain whether you think it might be a good idea for the Byrons to divide their investments between the two funds.
Lorrie and Dave Byron are saving for their children’s education. They estimate they will need about $10,000 a year for a six-year period beginning nine years from now. The Byrons have sufficient liquidity and will not need these investment funds until then. They have decided that mutual funds represent the best investment vehicle for them, and they are currently trying to select one for their first investment of $3,000.
Lorrie is impressed with the Sun Income Fund, which invests mainly in fixed-income securities. Lorrie notes that it has a good history of making distributions and that its rate of return last year (2007) was 17 percent. Dave disagrees with Lorrie’s selection; instead, he favors the Ambrux Capital Appreciation Fund. It invests heavily in the common stock of growth companies, and it distributes very little each year, preferring rather to reinvest capital gains. He argues that since they will not need distributions, it doesn’t make sense to invest in a fund that features them. He also notes that Ambrux’s rate of return last year was 33.4 percent, a much better performance than Sun’s. Lorrie agrees that growth might be a better investment goal than high current income, but she thinks it doesn’t matter how much a fund distributes, since they will elect to have all distributions reinvested in the fund anyway. Her preference for the Sun Fund rests mostly with her feeling that it is less risky—and she thinks the beta values for each support this view.
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