Investments, tenth edition

Class A Shares

Class B Shares

Horizon

$9,600 3 (1.10)

n

$10,000 3 (1.095)

n

 3 (1 2 percentage exit fee)

 1 year

$10,560

$10,000 3 (1.095) 3 (1 2 .04)  5 $10,512

 4 years

$14,055

$10,000 3 (1.095)

4

 3 (1 2 .01)  5 $14,233

10 years

$24,900

$10,000 3 (1.095)

10

 

5

 $24,782

     For a very short horizon such as 1 year, the Class A shares are the better choice. The front-end and 

back-end loads are equal, but the Class A shares don’t have to pay the 12b-1 fees. For moderate 

horizons such as 4 years, the Class B shares dominate because the front-end load of the Class A 

shares is more costly than the 12b-1 fees and the now-smaller exit fee. For long horizons of 

10 years or more, Class A again dominates. In this case, the one-time front-end load is less 

expensive than the continuing 12b-1 fees.  

   3.      a.     Turnover  5  $160,000 in trades per $1 million of portfolio value  5  16%.  

   b.   Realized capital gains are $10  3  1,000  5  $10,000 on FedEx and $2.50  3  4,000  5  $10,000  on 

Cisco. The tax owed on the capital gains is therefore .20  3  $20,000  5  $4,000.     

   4.  Twenty percent of the managers are skilled, which accounts for .2  3  400  5  80 of those managers 

who appear in the top half. There are 120 slots left in the top half, and 320 other managers, so 

the probability of an unskilled manager “lucking into” the top half in any year is 120/320, or 

.375. Therefore, of the 120 lucky managers in the first year, we would expect .375  3  120  5  45 

to repeat as top-half performers next year. Thus, we should expect a total of 80  1  45  5  125,  or 

62.5%, of the better initial performers to repeat their top-half performance.