Final answer:
To determine the impact of trading costs on an investment portfolio's return, we calculate the total cost of trades and subtract it from the expected portfolio growth. The $101,000 investment in 14 stocks, traded five times at $30 per trade, incurs a total yearly cost of $2,100, reducing the portfolio's nominal return of 14% to an actual return with trading costs considered.
Step-by-step explanation:
The question asks how much a $101,000 investment portfolio's total return will be reduced due to trading costs assuming an average market return of 14%. Each of 14 stocks is traded five times a year, incurring a transaction cost of $30 for each trade.
To determine the impact of the trading costs, we calculate the total cost of trades for the year and subtract this from the expected return.
Each stock incurs a cost of 5 trades × $30/trade = $150. With 14 stocks, the annual cost would be 14 × $150 = $2,100. The initial portfolio value is $101,000, and at a 14% market return, it would nominally grow to $101,000 × (1 + 0.14) = $115,140 without trading costs. With trading costs, the portfolio would grow to $115,140 - $2,100 = $113,040. Thus, trading reduces the portfolio's growth by $2,100.