ProShares UltraShort Silver
Asset Market value at the beginning of 2011: $200,000,000
Total Financial obligations: $10,000,000
No. of stocks outstanding: 17,393,910
NAV by the end of 2011: $10.94
Income and capital gain distribution per share/unit: $0.23
i. Net asset value (NAV) of the fund in the beginning of the year
NAV = (Market value of assets liabilities) / Shares outstanding
ii. What was the rate of return to an investor in the fund?
Rate of Return = (NAV1 NAV0 Income and capital gain distributions) / NAV0
(10.94-11.5)/11.5 = 4.87%
An active account involves a massive investment because it promises attractive returns. The investor holding this account is likely to be risk loving. A slight increase in the prices of base securities in a portfolio means an immense fortune for the holder of the portfolio. This is because he may have invested like one million dollars and thus an increase in prices by one dollar means one million dollar capital gain. In addition, this account is exposed to high risk since a slight decrease in the market price of base securities will imply a significant capital loss. This high-risk high return profile makes the operations of an active account subjective and involving. On the other hand, a passive account is relaxed and does not call for a large capital outlay. It does not require the investor to keep track of base security market prices on a real time basis and hence it is not subjective. This attributes make the account low risk low return. This means that the risk involved is minimal because there is no large capital outlay and for there to be a significant capital loss, a large change in base security market price must have occurred. An investor holding a passive account is likely to be risk averse.
The decision as to whether to invest in an active investment account for a passive fund requires thorough research on various economic conditions, risk preference of the investor, their wealth, plus the ratio of the cost involved in investing in an actively managed mutual fund to the returns expected from the investment. If the individual willing to invest is risk loving, wealthy, the economy is rising or is at its boom, and companies in the portfolio depict an upward growing trend, the invest should settle for an actively managed mutual fund. This is because the probability of making a lion kill is high. The value of the mutual fund is likely to grow with the upward growth of the economy, and a passive account may not take advantage of this opportunity.
However, if the contrary happens, that is, if the individual willing to invest is risk averse, not wealthy, the economy is declining or at recession and companies in the portfolio depict a downward growing trend, the investor should settle for a passive managed mutual fund. This is because an active account will accrue massive losses during a recession and considering the time value of money the losses might not be recovered. On the other hand, a passive account will not accrue enormous losses during the recession and the are3 likely to be recovered during the following boom of the economy. Based on the above analysis, I would advise a risk averse investor to take a passive account while a risk loving individual should take an actively managed mutual fund. This is because even the boom session may not carry along the investment value with them because of other factors affecting the mutual fund, like internal management and political climate of its environment.
Based on the expected return in part one, that is, 4.87%, I would advise an investor to invest in the ProShares UltraShort Silver (ZSL) fund because it is above the industrial average return of 4.66%. This means that an investor investing in this share will expect a higher return as compared to investment in other companies, in the same industry. Comparing the performance of ProShares UltraShort Silver (ZSL) fund and that of iShares Russell 2000 Index (IWM), Proshares are selling at 59.13 after a 3.19% drop while those of iShares are trading at 91.73 after a 0.2% drop. Both companies are experiencing a drop in their share price indicating that the economy could be at recession. However, Proshares is more affected than iShares and; therefore, iShares are performing better than Proshares. The fund manager of iShares is, therefore, likely to generate higher returns than the fund manager of Proshares.
Module 3 has opened up my mind on various investment challenges and opportunities available. It is now clear on the various attributes of both an actively managed account and a passive account. This module has several objectives; however I fill I have mastered two objectives, which are comparing and contrasting actively and passively managed fund accounts and the second one is performing basic calculations regarding the fund’s net asset value and the appropriate return to a potential investor.
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Yahoo. (2013). ProShares UltraShort Silver (ZSL). Retrieved April 6, 2013, from Yahoo Finance: http://ca.finance.yahoo.com/q?s=ZSL&ql=0