13. (Slightly tricky). Consider two open-ended mutual funds A and B managed by different managers. Statistics...

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13. (Slightly tricky). Consider two open-ended mutual funds A and B managed by different managers. Statistics for these two funds are given by the Table below. For simplicity, in this question, assume that the relevant benchmark market return is always zero. Therefore, if a fund delivers returns above zero consistently, it beats the market. Fund Fund A Fund B Assets under management (AUM) Fee rate $1,000 million $10 million 0.5% 2% Pre-fee return 1% 2% (a) (2 points) Do these two managers have the skill to beat the market? Please answer "both have the skill", "only A has the skill", "only B has the skill', or "neither have the skill" (1 point). Please justify your answer with explicit reasoning (1 point). (b) As in lecture 16, assume that the ability of funds to beat the market is fixed in dollar terms. i. (2 points) When ranking managers, we consider the person who can gener- ate a higher dollar amount of market-beating returns to be "more skilled". Given this criterion, is manager A more or less skilled than manager B? ii. (3 points) Suppose investors chase after funds with positive post-fee re- turns by giving them more money to manage until post-fee returns become zero, as Berk-and-Green theory predicts. How much more investment will flow into funds A and B, respectively?? 13. (Slightly tricky). Consider two open-ended mutual funds A and B managed by different managers. Statistics for these two funds are given by the Table below. For simplicity, in this question, assume that the relevant benchmark market return is always zero. Therefore, if a fund delivers returns above zero consistently, it beats the market. Fund Fund A Fund B Assets under management (AUM) Fee rate $1,000 million $10 million 0.5% 2% Pre-fee return 1% 2% (a) (2 points) Do these two managers have the skill to beat the market? Please answer "both have the skill", "only A has the skill", "only B has the skill', or "neither have the skill" (1 point). Please justify your answer with explicit reasoning (1 point). (b) As in lecture 16, assume that the ability of funds to beat the market is fixed in dollar terms. i. (2 points) When ranking managers, we consider the person who can gener- ate a higher dollar amount of market-beating returns to be "more skilled". Given this criterion, is manager A more or less skilled than manager B? ii. (3 points) Suppose investors chase after funds with positive post-fee re- turns by giving them more money to manage until post-fee returns become zero, as Berk-and-Green theory predicts. How much more investment will flow into funds A and B, respectively??

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a Based on the given information we can determine whether the managers have the skill to beat the ma... View the full answer