Investments, tenth edition

Year-End Change 

in Price

Year-End Value 

of Shares

Repayment of 

Principal and Interest

Investor’s Rate 

of Return

  30%

$19,500

$5,450

      40.5%

No change

15,000

5,450

     24.5 

2

30%

10,500

5,450

 249.5 

   6.      a.   Once Dot Bomb stock goes up to $110, your balance sheet will be:  

Assets

Liabilities and Owner’s Equity

Cash

$100,000

Short position in Dot Bomb

$110,000

T-bills

50,000

Equity

40,000

   b.  Solving

      

$150,000 2 1,000P

1,000P

5 .4  

 yields 

 

P   5  $107.14  per  share.               

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Final PDF to printer

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4

4

 P

AR

T I 

  THE PREVIOUS CHAPTER 

introduced you to 

the mechanics of trading securities and the 

structure of the markets in which securities 

trade. Commonly, however, individual inves-

tors do not trade securities directly for their 

own accounts. Instead, they direct their funds 

to investment companies that purchase secu-

rities on their behalf. The most important 

of these financial intermediaries are open-

end investment companies, more commonly 

known as mutual funds, to which we devote 

most of this chapter. We also touch briefly 

on other types of investment companies 

such as unit investment trusts, hedge funds, 

and closed-end funds. We begin the chap-

ter by describing and comparing the various 

types of investment companies available to 

investors. We then examine the functions of 

mutual funds, their investment styles and pol-

icies, and the costs of investing in these funds. 

Next we take a first look at the investment 

performance of these funds. We consider the 

impact of expenses and turnover on net per-

formance and examine the extent to which 

performance is consistent from one period 

to the next. In other words, will the mutual 

funds that were the best  past  performers be 

the best  

future  performers? Finally, we dis-

cuss sources of information on mutual funds, 

and we consider in detail the information 

provided in the most comprehensive guide, 

Morningstar’s  Mutual Fund Sourcebook.   

 CHAPTER FOUR