Question: Allison and Bill are both mutual fund managers, although Allison is more skilled than Bill. Both have $100 million in assets under management and charge

Allison and Bill are both mutual fund managers, although Allison is more skilled than Bill. Both have $100 million in assets under management and charge a fee of 1%/year. Allison is able to generate a 2% alpha before fees and Bill is able to generate a 1% alpha before fees.
a. What is the alpha investors earn in each fund (that is, the alpha after fees are taken out)?
b. Which fund will experience an inflow of funds?
c. Assume that both managers have exhausted the supply of good investment opportunities and so they will choose to invest any new funds received in the market and so those funds will earn a zero alpha. How much new capital will flow into each fund?
d. Once the new funds have stopped flowing, what is the alpha before and after fees of each fund? Which fund will be larger?
e. Calculate each manager's compensation once the capital has stopped flowing. Which manager has higher compensation?

Step by Step Solution

★★★★★

3.49 Rating (172 Votes )

There are 3 Steps involved in it

1 Expert Approved Answer

Step: 1 Unlock

a Bill 0 Allison 1 b Because investors in Allisons fund earn a ... View full answer

Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock

Step: 3 Unlock

Document Format (1 attachment)

1116-B-C-F-P-P(142).docx

120 KBs Word File

Students Have Also Explored These Related Corporate Finance Questions!

The Investment Company Act of 1940 prohibits a mutual fund from engaging in certain transactions in which there may be a conflict of interest between the manager of the fund and its shareholders....

Two mutual fund managers, Martha and David, have been bragging about whose fund is the top performer? Martha states that investors bought shares in her mutual fund ten years ago for $21.00 and those...

The CAPM is one of the most thoroughly researched models in financial economics. When beta is estimated in practice, a variation of CAPM called the market model is often used. To derive the market...

Allison and Bill are both mutual fund managers, although Allison is more skilled than Bill. Both have $200 million in assets under management and charge a fee of 1%/year. Allison is able to generate...

Allison and Bill are both mutual fund managers, although Allison is more skilled than Bill. Both have $300 million in assets under management and charge a fee of 1%/year. Allison is able to generate...

Allison and Bill are both mutual fund managers, although Allison is more skilled than Bill. Both have $100 million in assets under management and charge a fee of 1% per year. Allison is able to...

Bill and Allison are both mutual fund managers, although Bill is more skilled than Allison. Both have $300 million in assets under management and charge a fee of 1%/year. Bill is able to generate a...

On January 2, 2011, Joshon Hardware Company traded with a dealer an old delivery truck for a newer model. Data relative to the old and new trucks follow: Old truck: Original cost . . . . . . . . . ....

a) 1.851 b) 1.178 c) 2.206 The value of the reproduction factor 7 in uranium containing both U-235 (1) and U-238 (2) is given by N1o+N20 Calculate 7 for three reactors (a) thermal, with 3% U-235,...

Which one in the following list is NOT a financial intermediary? Group of answer choices Savings & Loans, and credit unions. Mutual funds, pension funds, and hedge funds. Large commercial banks and...

Do you disapprove of this sales tactic, or is it a legitimate business technique? How might it be morally defended?

Suppose that in 2016, Global launches an aggressive marketing campaign that boosts sales by 15%. However, their operating margin falls from 5.57% to 4.50%. Suppose that they have no other income,...

See Table 2.5 showing financial statement data and stock price data for Mydeco Corp. Suppose Mydeco had purchased additional equipment for $12 million at the end of 2013, and this equipment was...

Seven years ago, after 15 years in public accounting, Stanley Booker, CPA, resigned his position as manager of cost systems for Davis, Cohen, and OBrien Public Accountants and started Track Software,...

Delta Corporation has the following capital structure: Cost (aftertax) Weights Weighted Cost Debt ( K d ) 8.2 % 30 % 2.46 % Preferred stock ( K p ) 7.5 10 0.75 Common equity ( K e ) (retained...

Eamed Income Credit, Child and Dependent Care Credit (LO 7.2, 7.3) Clarita is a single taxpayer that lives in the U.S. with two dependent children, ages 10 and 12 . Clarito pays $3,000 in qualified...