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How to Calculate Net Asset Value

By Edited Nov 13, 2013 0 0

Net asset value is a term usually associated with a open- or closed-end mutual fund. A mutual fund, for those of you that aren't familiar, is a structured fund that follows a specific strategy. For instance, a S&P 500 Index fund attempts to replicate the returns of the S&P 500 index by buying and selling the holdings that are in that index. Any time you as an investor buys shares in an [open-ended] fund, the managers of the fund must buy all the stocks of the index to ensure a constant proportion of each stock in the index.

Things You Will Need

You could use Microsoft Excel if you're really enterprising!

Step 1

Before we calculate the net asset value, let's first define what it is. The net asset value is the total value of all the component companies that a fund holds divided by the number of fund shares outstanding. So, to use our previous example of the S&P 500 index fund, if the fund was $1.0 billion, then each component company would make up roughly $2.0 million of the portfolio. If there were 50 million shares outstanding, then the net asset value (NAV) would be around $20 per share.


Step 2

Most of the time, the calculation is as easy as described above--all funds even publish their NAV at the close of every trading day. However, for arbitrageurs (traders looking to find arbitrage in mispriced assets), calculating the net asset value manually might reveal times when the published value is not in fact correct.

Step 3

One of the main principles of arbitrage is that prices will tend towards their intrinsic value over time. So, if the trader finds that the NAV is understated, then he will buy up large quantities of shares of the fund, and simultaneously sell short the component companies (e.g. all members of the S&P 500). That way, he is completely market neutral since he bought and sold the exact same thing, but now he can force the fund to redeem his shares, and he will then keep the difference between the lower price he paid for the fund shares and the higher price he sold short the regular shares.

In short, net asset value is not difficult to calculate, but if you look in the right areas, you can find opportunities for arbitrage.

Tips & Warnings

Unfortunately, strategies like the one mentioned above are only really practical for those with a larger resource pool. In the case of the S&P 500 fund, buying an unknown amount of 500 different companies is not easy to do, nor inexpensive.

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