Question: Portfolio managers are frequently paid a proportion of the funds under
Portfolio managers are frequently paid a proportion of the funds under management. Suppose you manage a $100 million equity portfolio offering a dividend yield (DIV1 / P0 of 5%. Dividends and portfolio value are expected to grow at a constant rate. Your annual fee for managing this portfolio is .5% of portfolio value and is calculated at the end of each year. Assuming that you will continue to manage the portfolio from now to eternity, what is the present value of the management contract? How would the contract value change if you invested in stocks with a 4% yield?
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