question archive Problem 4-23 Suppose that every time a fund manager trades stock, transaction costs such as commissions and bid-ask spreads amount to 0
Problem 4-23 Suppose that every time a fund manager trades stock, transaction costs such as commissions and bid-ask spreads amount to 0
Subject:FinancePrice:2.86 Bought7
Problem 4-23 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 70%, by how much is the total return of the portfolio reduced by trading costs? (Round your answer to 2 decimal places.) Reduction in portfolio returns %
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The portfolio turnover rate is 70%, which suggest that 70% on an average of the portfolio is sold and replaced each year.
The trading cost is 0.4%. This cost is imposed both for the sale and purchase of the portfolio. So in totality the cost is being doubled i.e., 2 times.
Reduce in portfolio return = Total portfolio * Total cost * Turnover rate
= 2*0.4%*70%
= 0.56%
