Suppose
that every time a fund manager trades stock, transaction costs such as
commissions and bid–ask spreads amount to 2.7% of the value of the
trade. If the portfolio turnover rate is 50%, by how much is the total
return of the portfolio reduced by trading costs?

**(Round your answer to 1 decimal place.)**Fall in returns | % |

Explanation:

The
turnover rate is 50%. This means that, on average, 50% of the portfolio
is sold and replaced with other securities each year. Trading costs on
the sell orders are 2.7%; the buy orders to replace those securities
entail another 2.7% in trading costs. Total trading costs will reduce
portfolio returns by: 2 × 0.027 × 0.5 = 0.027 or 2.7%