Question

Suppose that every time a fund manager trades stock, transaction costs such as commissions and bid–ask spreads amount to 0.4% of the value of the trade. If the portfolio turnover rate is 50%, by how much is the total return of the portfolio reduced by trading costs? (Round your answer to 1 decimal place.)

Answer 1

Answer: 0.4%

Explanation:

Given that,

At every time a fund manager trades stock, then

Transaction costs = 0.4% of the value of the trade

Portfolio turnover rate = 50% ; On an average, 50% of the portfolio stock is sold and exchange with the other securities every year.

Trading costs on selling orders = 0.4%

Trading costs on buying orders = 0.4%

Therefore,

Total return of the portfolio reduced by trading costs:

$= 2\times0.50\times0.004$

      = 0.4%