4% commission is $9,600. If the fund earns a 10% return, the investment will grow after n years to $9,600 (1.10)n. The Class B shares have no front-end load. However, the net return to the investor after 12b-1 fees will be only 9.5%. In addition, there is a back-end load that reduces the sales proceeds by a percentage equal to (5 - years until sale) until the fifth year, when the back-end load expires. I. Introduction 4. Mutual Funds and Other Investment Companies The McGraw−Hill Companies, 2001           130 PART I Introduction       SOLUTIONS TO CONCEPT C H E C K S Class A Shares Class B Shares   Horizon $9,600 (1.10)n $10,000 (1.095)n (1 - percentage exit fee)   1 year $10,560 $10,000 (1.095) (1 -.04) = $10,512 4 years $14,055 $10,000 (1.095)4 (1 - .01) = $14,233 10 years $24,900 $10,000 (1.095)10 = $24,782     For a very short horizon such as one year, the Class A shares are the better choice. The front-end and back-end loads are equal, but the Class A shares dont have to pay the 12b-1 fees. For moderate horizons such as four years, the Class B shares domi- nate because the front-end load of the Class A shares is more costly than the 12b-1 fees and the now-smaller exit fee. For long horizons of 10 years or more, Class A again dominates. In this case, the one-time front-end load is less expensive than the continuing 12b-1 fees. 3. a. Turnover = $160,000 in trades per $1 million of portfolio value = 16%. b. Realized capital gains are $10 1,000 = $10,000 on Microsoft and $5 2,000 = $10,000 on Ford. The tax owed on the capital gains is therefore .20 $20,000 = $4,000. 4. Out of the 100 top-half managers, 40 are skilled and will repeat their performance next year. The other 60 were just lucky, but we should expect half of them to be lucky again next year, meaning that 30 of the lucky managers will be in the top half next year. Therefore, we should expect a total of 70 managers, or 70% of the better performers, to repeat their top-half performance.