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CFA Level I · CFA Level I Exam · Types of Financial Returns

Two funds have the same gross return, but Fund X has higher management fees than Fund Y. Compared with Fund Y, Fund X's net return is most likely:

Fund X's net return is most likely lower. Net return is gross return less management and administrative fees, so with identical gross returns the higher-fee fund keeps less. Net return is not an after-tax measure, so taxes do not equalize the two funds.

  1. Alower, because fees are deducted from gross returnCorrect
  2. Bhigher, because fees are tax deductible
  3. Cthe same, because net return is measured after taxes

Explanation

Net return equals gross return minus management and administrative fees. With equal gross returns, the fund with higher fees has a lower net return. Tax treatment of fees does not make net return higher than gross, and net return is defined before taxes.

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