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 55%, by how much is the total return of the portfolio reduced by trading costs? (Round your answer to 2 decimal places.)

Answer 1

Answer: 0.73%

Explanation: Trading / Transaction cost / comission = 0.4%

Portfolio turnover rate = 55%

1. Total return of portfolio reduced by the trading cost.

= Trading cost / portfolio turnover * 100

= 0.4/55 *100

= 0.73%

= 55% - 0.73% = 54.27%

Answer 2

Answer:

A fund manager exchanges the stock on standard base. The level of the exchange costs is 0.4%. The exchange costs include commissions and bid-ask spreads. The turnover proportion of the portfolio is 50%.  

Thus, exchanging cost diminishes the portfolio's all out return.  

All out return is the general come back from a speculation over some stretch of time that comprises of a wide range of pay.  

Since the turnover rate is 50%, which obviously implies the reserve chief sells 50% of the portfolio and replaces them with different protections.  

The given exchanging cost is 0.4% and another 0.4% is being brought about on the purchase orders given to supplant the protections.  

In this manner, in totality the expense is being multiplied, that is, multiple times.  

Figure the portfolio's absolute return diminished by the exchange cost utilizing the accompanying condition:  

Decreased measure of return = Total portfolio × Total expense × Turnover rate  

Substitute 2 for all out portfolio, 0.4% for all out expense, and 50% for turnover rate in the condition of decreased measure of return.

Reduced amount = Total portfolio × total cost × turnover

Reduced amount = 2 × 0.4% × 50%

Reduced amount = 2 × 0.004 × 0.50

Reduced amount = 0.004 (or) 0.4%

Therefore, the trading costs reduce the 0.4% of the portfolio's total return.