# Question

Index funds are mutual funds that try to mimic the movement of leading indexes, such as the S& P 500 or the Russell 2000. The beta values (as described in Problem 12.49) for these funds are therefore approximately 1.0, and the estimated market models for these funds are approximately

(% weekly change in index fund) = 0.0 + 1.0

(% weekly change in the index)

Leveraged index funds are designed to magnify the movement of major indexes. Direxion Funds is a leading provider of leveraged index and other alternative class mutual fund products for investment advisors and sophisticated investors. Two of the company’s funds are shown in the following table:

The estimated market models for these funds are approximately

(% weekly change in TNA) = 0.0 + 3.0

(% weekly change in the Russell 2000)

(% weekly change in DXSSX) = 0.0 + 22.0

(% weekly change in the S& p 500 Index)

Index2 Thus, if the Russell 2000 Index gains 10% over a period of time, the leveraged mutual fund TNA gains approximately 30%. On the downside, if the same index loses 20%, TNA loses approximately 60%.

a. The objective of the Direxion Funds Bull 3x Fund, SPXL, is 300% of the performance of the S& P 500 Index. What is its approximate market model?

b. If the S& P 500 Index gains 10% in a year, what return do you expect SPXL to have?

c. If the S& P 500 Index loses 20% in a year, what return do you expect SPXL to have?

d. What type of investors should be attracted to leveraged index funds? What type of investors should stay away from these funds?

(% weekly change in index fund) = 0.0 + 1.0

(% weekly change in the index)

Leveraged index funds are designed to magnify the movement of major indexes. Direxion Funds is a leading provider of leveraged index and other alternative class mutual fund products for investment advisors and sophisticated investors. Two of the company’s funds are shown in the following table:

The estimated market models for these funds are approximately

(% weekly change in TNA) = 0.0 + 3.0

(% weekly change in the Russell 2000)

(% weekly change in DXSSX) = 0.0 + 22.0

(% weekly change in the S& p 500 Index)

Index2 Thus, if the Russell 2000 Index gains 10% over a period of time, the leveraged mutual fund TNA gains approximately 30%. On the downside, if the same index loses 20%, TNA loses approximately 60%.

a. The objective of the Direxion Funds Bull 3x Fund, SPXL, is 300% of the performance of the S& P 500 Index. What is its approximate market model?

b. If the S& P 500 Index gains 10% in a year, what return do you expect SPXL to have?

c. If the S& P 500 Index loses 20% in a year, what return do you expect SPXL to have?

d. What type of investors should be attracted to leveraged index funds? What type of investors should stay away from these funds?

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