Morningstar tracks the total return for a large number of mutual funds. The following table shows the total return and the number of funds for four categories of mutual funds
(Morningstar Funds500, 2008).
Type of Fund
Domestic Equity
International Equity
Specialty Stock
Hybrid Number of Funds
9191
2621
1419
2900
Total Return (%)
4.65
18.15
11.36
6.75
a. Using the number of funds as weights, compute the weighted average total return for
the mutual funds covered by Morningstar.
b. Is there any difficulty associated with using the "number of funds" as the weights in
computing the weighted average total return for Morningstar in part (a)? Discuss. What
else might be used for weights?
c. Suppose you had invested $10,000 in mutual funds at the beginning of 2007 and
diversified the investment by placing $2000 in Domestic Equity funds, $4000 in International Equity funds, $3000 in Specialty Stock funds, and $1000 in Hybrid
funds. What is the expected return on the portfolio?

Kindly check explanation

Step-by-step explanation:

Given the following :

Type of Fund___No of fund(a) __total return%(b)

Domestic Equity91914.65

International Equity__262118.15

Specialty Stock141911.36

Hybrid29006.75

A) weighted average :

Σa.b /Σa = (9191 * 4.65) + (2621 * 18.15) + (1419 * 11.36) + (2900 * 6.75) / (9191 + 2612 + 1419 + 2900)

= 126004.14 / 16122

= 7.8156643

B) Using the number of funds as weight poses a difficulty as it considers the cost of funds rater than it's value. Hence, the higher the cost, the higher the return. Value of funds would have been a better weight parameter.

C) c. Suppose you had invested $10,000 in mutual funds at the beginning of 2007 and

diversified the investment by placing $2000 in Domestic Equity funds, $4000 in International Equity funds, $3000 in Specialty Stock funds, and $1000 in Hybrid

funds. What is the expected return on the portfolio?

Expected return = Σ (p)*(x)

= (2000*4.65) + (4000*18.15) + (3000*11.36) + (1000*6.75) = $122,730

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step-by-step explanation: