1 Suppose a manager is allocated 4,000 shares of an IPO offered at $20 a share but closesat $25 a share on the rst day of trading. The manager identies three client accounts thatare appropriate for the IPO allocation. These accounts are in the amount of $1 million,$5 million, and $10 million. The manager plans to take whatever amount is needed out of the account to provide the client with the IPO allocation at the IPO offer price. Assumethat all of the assets remaining in all three accounts earn 10 percent. Calculate the returnto each account depending on whether the shares are allocated equally or on a pro ratabasis. Which method do you think is most equitable, and why?

2 After graduation you started working for a small money management rm, takingadvantage of the opportunity to grow your career along with the rm. It is now 10 yearslater.Whenyou rststartedwith therm,themanagersusedsoft dollarsto helpoffset thecost of investment research, which in turn allowed them to keep their management feeslow. This strategy, along with a successful track record of providing clients with excellentrisk-adjusted returns (no doubt owing to hiring talented professionals such as you),allowed the company to aggressively grow its business and assets under management.Over time the company has been able to raise management fees but still continues tooffset researchcosts with theuse of soft dollars. Is the continueduseof soft dollarsethical?Under what circumstances would it be unethical?

3 You are trying to decide which fund to recommend to your client. The historical returnsfor Fund A and Fund B are below. For Fund A, you will be paid 25 basis points at theend of each quarter out of your clients account; for Fund B, you will earn 35 basis points.Assume that your client has $100 million to invest. Determine which account is likely to be better for your client and better for you by calculating (a) your clients accountbalance at the end of the eight quarters net of fees; (b) average return divided by standarddeviation as a measure of the risk adjusted return; and (c) your total fees earned for eachfund. Based on these calculations, which account will you recommend and why? Wouldthere be a difference in the account recommended by an unethical versus ethical advisor?

Quater	Fund A Returns	Fund B Returns
1	5	3
2	6.5	9
3	3	1
4	4.5	8
5	10	15
6	0.5	-2
7	4	9
8	3	5