?a. An investor purchases shares in a no load mutual fund for its net asset value of $26 and during the year receives cash distributions of $1. After one year the investor redeems the shares for $32. What is the percentage return on the investment? ? b. The net asset value of shares in a closed-end investment company is $26. An investor buys the shares for $23 in the secondary market. During the year the company distributes $1. After one year, the net asset rises to $32, and the investor sells the shares for $34 in the secondary market. What is the percentage return on the investment? ? c. In both a. and b., the net asset value rises from $26 to $32 and the company distributed $1. Why are the percentage returns different? ?
What will be an ideal response?
a. The percentage return is ($32 - 26 + 1)/$26 = 26.9%?b. The percentage return is ($34 - 23 + 1)/$23 = 52.1%?c. While the net asset values are the same, the closed-end fund initially sold for a discount of $3 ($26 - 23) and subsequently sold for a premium of $2 ($34 - 32). The investor purchased and sold the shares in the secondary market and not from the fund at the share's net asset value. The price improvement from a discount to a premium increased the return.?
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