Question:
The Damon Investment Company manages a mutual fund composed mostly of speculative stocks. You
recently saw an ad claiming that investments in the funds have been earning a rate of return of 21%. This
rate seemed quite high so you called a friend who works for one of Damon’s competitors. The friend told
you that the 21% return figure was determined by dividing the two-year appreciation on investments in
the fund by the average investment.
In other words, $100 invested in the fund two years ago would have grown to $121 ($21 ÷ $100 = 21%).
Required:
Discuss the ethics of the 21% return claim made by the Damon Investment Company.
Answer:
The ethical issue is that the 21% return implies an annual return of 21% on an investment and
misrepresents the fund’s performance to all current and future stakeholders. Interest rates are usually
assumed to represent an annual rate, unless otherwise stated. Interested investors may assume that the
return for $100 would be $21 per year, not $21 over two years. The Damon Investment Company ad
should explain that the 21% rate represented appreciation over two years.
The Damon Investment Company manages a mutual fund composed mostly of speculative stocks. You
recently saw an ad claiming that investments in the funds have been earning a rate of return of 21%. This
rate seemed quite high so you called a friend who works for one of Damon’s competitors. The friend told
you that the 21% return figure was determined by dividing the two-year appreciation on investments in
the fund by the average investment.
In other words, $100 invested in the fund two years ago would have grown to $121 ($21 ÷ $100 = 21%).
Required:
Discuss the ethics of the 21% return claim made by the Damon Investment Company.
Answer:
The ethical issue is that the 21% return implies an annual return of 21% on an investment and
misrepresents the fund’s performance to all current and future stakeholders. Interest rates are usually
assumed to represent an annual rate, unless otherwise stated. Interested investors may assume that the
return for $100 would be $21 per year, not $21 over two years. The Damon Investment Company ad
should explain that the 21% rate represented appreciation over two years.
