Suppose a (very skilled) fund manager earns a safe return of .70% per trading day. There are 252 trading days per year. (a) What will be your annualized holding period return on $100 invested in the fund if the manager allows you to reinvest in her fund the .70% you earn each day? (b) What will be your annualized holding period return assuming the manager puts all of your daily earnings into a zero-interest-bearing checking account and pays you everything earned at the end of the year?
Suppose a (very skilled) fund manager earns a safe return of .70% per trading day. There are 252 trading days per year.
(a) What will be your annualized holding period
if the manager allows you to reinvest in her fund the .70% you earn each day?
(b) What will be your annualized holding period return assuming the manager puts
all of your daily earnings into a zero-interest-bearing checking account and pays
you everything earned at the end of the year?
Answer a. In the first case, there will be a compounding effect on the daily earnings as they get re-invested at the same interest rate for a period of 252 days.
Answer b. In this case, we will have to calculate the simple interest on the account for the number of days and then calculate the holding period return.
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