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?

Ticker Svmbol TNA DXSSX Name Description Daily Small Cap 300% of the Russell Bul 3x Fund Monthly S&P Bear 2x Fund 2000 Index 200% of the S&P 500 Index