Portfolio Management puzzles, solved step by step

Puzzles: 100
Traced to a firm: 31
Topics: 13
Hard: 30

Showing 11–20 of 20 · filtered from 100Clear filters

051A two-year bond pays an 8% annual coupon and repays 100 at maturity. Market yields for this bond are 7%. What is its price, and why is it above par?Bond mathsWarm upJ.P. Morgancloumbus · 2026
Try it first
Before you discount anything: where does the price land?
Show the worked solution
About 101.81. Discount each cash flow at 7%: the year 1 coupon of 8 is worth 7.48 today and the year 2 payment of 108 is worth 94.33, which add to 101.81. The bond sits above par because it pays 8 when the market only asks for 7, and a buyer pays up for that extra coupon until the return on the price paid falls back to 7%.
What does pricing a bond actually mean?
Think of a friend who promises you Rs 8 next year and Rs 108 the year after. What would you hand over today? If you can earn 7% elsewhere, each promised rupee is worth less the further away it sits. A bond's price is every promised cash flow divided by one plus the yield, once for each year you wait, and then added up. Here that is 8 divided by 1.07, which is 7.48, plus 108 divided by 1.07 twice, which is 94.33. The total is 101.81.
The relationship
$P = \frac{8}{1.07} + \frac{108}{1.07^2} = 7.48 + 94.33 = 101.81$
8 the annual coupon on 100 of face value
108 the final coupon plus the principal
1.07 one plus the market yield
What it says in wordsDiscount each payment by the yield for as many years as you wait, then add.
Discounted at 7%, the year 1 coupon is worth 7.48 and the year 2 payment of 108 is worth 94.33, stacking to 101.81; the 1.81 above par is exactly the extra 1 a year of coupon over a 7% bond, valued today.
Why must a bond with a high coupon trade above par?
Suppose it traded at 100. A buyer would earn 8% on a bond when the market pays 7% for the same risk, so everyone would want it and the price would rise. The price climbs until the return on the price paid equals the market yield, and that happens at a premium over par. The premium is easy to see directly: compared with a 7% bond at 100, this one pays an extra rupee each year for two years, worth 0.93 plus 0.87, which is 1.81. That is a check on the long method, and it is quicker to say in the room.
The same logic runs the other way. A coupon below the market yield means a discount to par, and a coupon equal to the yield means exactly 100. If you are asked how you would price a bond in today's market, say that the yield comes from comparable bonds of the same credit and maturity; the arithmetic above is the easy part. A premium bondA bond whose price is above its face value, because its coupon is higher than the yield the market currently demands. also pulls back towards 100 as it nears maturity, so a buyer at 101.81 loses the premium slowly while collecting the fat coupon.
Where candidates lose it
The common slip is adding the extra coupons without discounting them and answering 102. The extra rupee in year 2 is worth only 0.87 today, and saying 102 tells the interviewer you know the direction but not the method.
The second loss is getting 101.81 without saying why it must be above 100. Give the one-line reason: the coupon beats the market yield, so buyers bid the price up until the return on the price paid is 7%.
What the interviewer asks next
What would the price be if yields were 9% instead?
Why does the premium on this bond shrink as it approaches maturity?
Where would you find the right yield to price a bond like this in practice?
Asked at J.P. Morgan, Generalist, cloumbus, 2026 (Wall Street Oasis): How would you price a bond in today's market
052A fund's NAV at six successive year-ends is 100, 130, 91, 120, 84 and 140. What is its maximum drawdown?Performance measurementWarm upPerformance analysisRisk management
Try it first
Pick the maximum drawdown before you work it.
Show the worked solution
Minus 35.4%, from the peak of 130 to the trough of 84. Track the running peak: 100, then 130, which holds until 140 in the final year. The deepest fall below that peak is 84, and 84 over 130 minus 1 is -35.4%. The earlier dip to 91 was only minus 30%, and the fall from the starting 100 looks like just 16%.
Measured from where?
Picture a climber on a ridge. How far she has fallen is measured from the highest point she reached, not from the car park and not from the step she took a moment ago. A drawdown is the fall from the running peak, the highest NAV seen so far, and the peak only resets when the NAV climbs above it. Here the peak jumps to 130 in year 1 and then sits there through the dip to 91, the recovery to 120 and the slide to 84. Every one of those years is inside the same drawdown.
The running peak holds at 130 from year 1 until the NAV reaches 140 in year 5, and the deepest point under that peak is 84 in year 4, so the maximum drawdown is -35.4%, much deeper than the 16% fall the start value suggests.
The relationship
$\text{MDD} = \min_t \left(\frac{V_t}{\max_{s\le t} V_s} - 1\right) = \frac{84}{130} - 1 = -35.4\%$
V_t the NAV at year-end t
max over s up to t the running peak, the highest NAV seen so far
What it says in wordsAt each date, compare the NAV with the best level reached so far; the worst of those comparisons is the maximum drawdown.
Why does the recovery to 120 not end the drawdown?
Because 120 is still below 130. Anyone who invested at the peak was still under water at 120, and the slide to 84 took them further down. A partial recovery does not reset the peak, so two separate-looking dips can be one long drawdown. Treating 120 as a new start gives a fall of 30% to 84, which is wrong on the question asked, though it is a correct answer to how bad the single year was.
Say what the number misses as well. Maximum drawdown is one path and one worst point, so it tells you nothing about how long the fund stayed under water, here four years from year 1 to year 5, and a longer history almost always shows a deeper one. Allocators read it next to the recovery time for that reason.
Where candidates lose it
The fast answer is 16%, the fall from the starting 100 to 84. It measures the investor who bought at launch, not the worst experience, and interviewers ask this with the path deliberately chosen so the start value misleads.
The second trap is resetting the peak at 120 and answering 30%. Say the rule out loud before you calculate: the peak only moves when the NAV beats it.
What the interviewer asks next
How long was the fund under water, and why do allocators care about that as much as the depth?
What gain was needed from 84 to recover the 130 peak?
Why does a longer track record almost always show a deeper maximum drawdown?
053You have nine bags of coins that look identical. Eight weigh the same and one is lighter. Using a balance scale with no weights, what is the fewest number of weighings that always finds the light bag?Logic brainteasersWarm upAsset management
Try it first
What is the fewest weighings that is guaranteed to work?
Show the worked solution
Two weighings. Put three bags on each side and leave three aside. Whichever side rises holds the light bag; if the pans balance, it is among the three on the table. Take that group of three and weigh one bag against another: the one that rises is light, and if they balance, it is the third. A balance gives three outcomes per weighing, and three times three covers nine bags.
Why is halving the pile the wrong instinct?
Halving is what you would do with a question that answers yes or no, like guessing a number between 1 and 100. A balance tells you more than that. A balance scale has three outcomes, left pan rises, right pan rises, or level, so each weighing should split the suspects into three equal groups, not two. The group left on the table is not wasted: a level balance is information too. With four and four plus one aside you would learn little from a level result except that the odd bag is the spare one, and an unlucky run needs three weighings.
Weighing three bags against three splits nine suspects into three groups of three, whichever way the pans move, and weighing one bag against one then names the light bag, so two weighings give nine end points, one for each bag.
How do you prove two is the minimum?
Count outcomes. One weighing produces at most three different results, and three results cannot point to nine different bags. With k weighings you can separate at most 3 to the power k bags, so nine bags need at least two weighings, and the method above shows two is enough. The same count answers the natural follow-up: three weighings handle up to 27 bags, four handle 81.
The relationship
$3^k \ge n \quad\Rightarrow\quad 3^2 = 9 \ge 9$
k the number of weighings
n the number of bags, one of which is light
3 outcomes of one weighing: left light, right light, balanced
What it says in wordsEach weighing multiplies the number of distinguishable outcomes by three, so you need enough weighings for the outcomes to cover every bag.
Why would an asset manager ask this? It is a test of whether you use all the information a measurement gives you. A risk report, a performance attribution or a data screen can be read in more ways than pass and fail, and the candidate who spots the third outcome here is the one who reads the level result as a finding.
Where candidates lose it
The trap is answering three or four because you split into halves. It is the natural instinct, and the interviewer is watching whether you notice that a balance can come out level, which is a result in its own right.
The second loss is giving two without the counting proof. Say the 3 to the power k rule in one sentence: it shows you know the answer is a minimum, not just a method that happened to work.
What the interviewer asks next
How many weighings do you need for 27 bags? For 100?
Now you do not know whether the odd bag is heavier or lighter, and there are twelve. How many weighings?
You may take any number of coins from each bag and weigh once on a scale that shows grams. How do you find the light bag?
054Without a calculator: what IRR turns money into 2.5 times in four years, and what IRR turns it into 3 times in five years?Private and real asset mathsWarm upNeuberger BermanLondon · 2026
Try it first
Which pair is closest?
Show the worked solution
About 26% and about 25%. For 2.5 times in four years, take the square root of 2.5 twice: 1.58 and then 1.257, so 25.7% a year. For 3 times in five years, anchor on the fact that 2 times in three years is 26%; 3 times in five sits just below it at 24.6%. The bigger multiple over the longer hold is actually the lower annual return.
Why is the simple average so far off?
A savings account that pays 26% a year does not add 26 rupees every year to your 100. It adds 26 in year one, then 26% of 126 in year two, and so on, so by year four you have about 250. The IRR is the steady annual rate that compounds to the multiple, so it is always well below the total gain divided by the years. The simple average for 2.5 times in four years would be 150% over 4, or 37.5%, which overstates the true 25.7% by more than ten points.
The relationship
$\text{IRR} = M^{1/n} - 1 \qquad 2.5^{1/4} - 1 = 25.7\% \qquad 3^{1/5} - 1 = 24.6\%$
M the money multiple, cash back over cash in
n the years held, with one cash flow in and one out
What it says in wordsThe IRR is the nth root of the multiple, less one.
How do you get there in your head?
Use one of two tricks. For four years, take the square root twice: the square root of 2.5 is about 1.58, and the square root of 1.58 is about 1.257. For odd holding periods, use logs: the natural log of 3 is about 1.10, divided by five is 0.22, and adding a little for compounding turns 22% into about 24.6%. Faster still is a small grid of anchors you know by heart, because interviewers ask the same handful of multiples and periods.
A grid of IRRs by multiple and holding period shows 2.5 times in four years at 25.7% and 3 times in five years at 24.6%, and a band of 2 times in three, 2.5 times in four and 3 times in five years all near 25%.
Notice the diagonal band. Two times in three years, two and a half in four and three in five all land within a point of 25%. That one pattern lets you place almost any private equity outcome in a second. Say the limitation too: this shortcut assumes a single cash flow in and a single cash flow out. Real funds call and return money in stages, and the IRR then depends on the timing, not just the multiple.
Where candidates lose it
The trap is dividing the gain by the years, 150% over four and 200% over five, and answering 37.5% and 40%. It sounds confident and is wrong by more than ten points, and a private markets interviewer hears it as not understanding compounding.
The quieter miss is thinking 3 times must be the better deal because the multiple is bigger. The extra year costs more than the extra half turn of money earns.
What the interviewer asks next
What multiple does a 20% IRR give over five years?
A fund returns 2 times in three years and another 2.5 times in six. Which would you rather have, and what else would you ask?
Why can two deals with the same multiple and the same holding period show different IRRs?
Asked at Neuberger Berman, Generalist, London, 2026 (Wall Street Oasis): The associate interview was quite technical, covered 5-7 questions on valuation and understanding of returns in private equity
055An open-ended fund holds Rs 500 crore of assets across 20 crore units, a NAV of Rs 25. Investors redeem Rs 50 crore. What happens to the NAV and to the number of units?Funds, ETFs and implementationWarm upMorningstarMumbai · 2025
Try it first
Straight after the redemption, what is the NAV?
Show the worked solution
The NAV stays at Rs 25; the units fall from 20 crore to 18 crore. Redemptions are paid at NAV, so Rs 50 crore buys back 2 crore units at Rs 25 each and those units are cancelled. The fund is left with Rs 450 crore of assets across 18 crore units, which is still Rs 25 a unit. A redemption shrinks the fund, not the value of each unit.
Why does money leaving not lower the NAV?
Think of a pizza cut into 20 equal slices. If two friends leave and take their slices with them, 18 slices remain, and each one is exactly as big as before. An open-ended fund cancels the units that are redeemed and pays out exactly what they were worth, so assets and units fall in the same proportion and the NAV per unit does not move. Rs 50 crore at Rs 25 a unit is 2 crore units cancelled, leaving Rs 450 crore across 18 crore units.
Rs 50 crore of redemptions cancels 2 of the fund's 20 crore units at Rs 25 each, so assets fall to Rs 450 crore and units to 18 crore, and the NAV is still Rs 25 a unit.
The relationship
$\text{NAV} = \frac{\text{assets} - \text{liabilities}}{\text{units}} = \frac{500 - 50}{20 - 2} = 25$
assets the market value of everything the fund holds, Rs crore
units units outstanding, crore
2 units cancelled, 50 divided by the NAV of 25
What it says in wordsTake the same amount off the top and the bottom in the same proportion, and the ratio does not change.
So what does a redemption change?
Two things, both real. First, the manager must raise the Rs 50 crore, usually by selling holdings, and the transaction costsBrokerage, taxes and the price impact of selling, paid out of the fund when it trades. of those sales are paid by the whole fund, including the investors who stayed. Large redemptions dilute the remaining investors through trading costs, not through the NAV arithmetic. Exit loads, where a scheme charges them and credits them back to the scheme, go the other way and cushion those who stay. Second, a fund that has to sell in a hurry may sell what is easiest to sell, which leaves the remaining portfolio less liquid than before.
The day's NAV is the one used, struck after the market closes, which is why a redeeming investor cannot know the exact price when placing the request. The precise cut-off times and load rules are set by the regulator and the scheme documents, so confirm the current ones rather than quoting them from memory.
Where candidates lose it
The trap is answering Rs 22.50: dividing the smaller Rs 450 crore by the old 20 crore units. Candidates who think of NAV as a share price picture money leaving as bad news for the price. In a fund, the leavers take their units with them.
The opposite miss, Rs 27.78, divides the old assets by the new unit count. Say it as one sentence: units are cancelled at NAV, so both halves of the ratio fall together.
What the interviewer asks next
Who bears the cost when a large redemption forces the fund to sell illiquid holdings?
What happens to the NAV when new money comes in instead?
How does an ETF handle outflows differently from an open-ended fund?
Asked at Morningstar, Private Markets, Mumbai, 2025 (Wall Street Oasis): They asked questions such as: What are derivatives? Can you explain NAV? What are ETFs?
076A Rs 100 crore bond portfolio has a modified duration of 5. What is its DV01, and roughly what does a 25 basis point rise in yields cost?Bond mathsWarm upFixed incomeRisk management
Try it first
Say the DV01 before you work it through.
Show the worked solution
DV01 is Rs 5 lakh, so a 25 basis point rise costs about Rs 1.25 crore. Modified duration of 5 means the value moves about 5% for each percentage point of yield, or 0.05% per basis point. 0.05% of Rs 100 crore is Rs 5 lakh, and 25 basis points is 25 times that.
Why turn duration into rupees at all?
A shopkeeper who says the rent went up 4% has told you something; one who says it went up Rs 2,000 a month has told you what to do about it. Duration is the percentage version. DV01, the rupee change for a one basis point move, is the version a desk can add across positions, compare with a limit and put in a risk report. Two portfolios with the same duration but different sizes carry very different rupee risk, and only DV01 shows it.
Rs 100 crore times a modified duration of 5 times 0.0001 is Rs 5 lakh per basis point, so a 25 basis point rise in yields takes Rs 1.25 crore off the portfolio, one Rs 5 lakh notch at a time.
The relationship
$\text{DV01} = V \times D_{mod} \times 0.0001 = 100 \times 5 \times 0.0001 = 0.05 \text{ crore}$
V portfolio value, Rs 100 crore
D_mod modified duration, 5
0.0001 one basis point written as a decimal
What it says in wordsThe rupee move for one basis point is the value times the duration times one hundredth of one per cent.
Where does the straight-line answer stop being right?
The modified durationThe percentage change in a bond price for a one percentage point change in its yield, taken at the current yield. estimate is a tangent: it treats the price and yield relationship as a straight line. For 25 basis points the straight line is close enough, but for a 200 basis point shock the curve bends away from it and the true loss is smaller than DV01 times 200. That bend is convexity. Mention it in one sentence; the interviewer will often ask for it next.
Say also that DV01 assumes every yield in the portfolio moves by the same amount. If short rates rise and long rates stay still, a single DV01 number misses it, which is why desks also keep DV01 by maturity bucket.
Where candidates lose it
The common slip is out by a factor of 100: treating duration 5 as 5% per basis point and saying Rs 5 crore. The interviewer hears that you have not held a real rate position, where the size of one basis point is the first thing you learn.
The second loss is stopping at the number. Say that DV01 is linear, so it overstates the loss for large rises, and that it assumes a parallel move.
What the interviewer asks next
The portfolio doubles in size and duration falls to 2.5. What is DV01 now?
How would you cut DV01 by half without selling any bonds?
Why might a desk set a limit in DV01 rather than in duration?
077Money doubles every six years. How long does it take to grow to eight times, and roughly what annual return does that imply?Compounding and fee dragWarm upWealth managementAsset management
Try it first
How many years to reach eight times?
Show the worked solution
Eighteen years, at about 12.2% a year. Eight is two times two times two, so reaching eight times takes three doubling periods of six years each. The return that doubles money in six years is 2 to the power one sixth, less one, which is 12.2%; the rule of 72 gives 12% as a quick check.
Why count doublings instead of dividing?
A rumour passed on by each listener to two new people reaches 2, then 4, then 8. Nobody counts that as adding 2 each round; it doubles each round. A compounding balance works the same way, so any multiple that is a power of two is just a count of doubling periods. Eight is two cubed: three doublings, eighteen years. Sixteen times would be four doublings, twenty four years.
Money that doubles every six years is worth 2 times at year 6, 4 times at year 12 and 8 times at year 18, and the smooth path between those points is a steady 12.2% compounded each year.
How do you get the annual return without a calculator?
Use the rule of 72: the doubling time multiplied by the rate is roughly 72, so 72 divided by 6 is 12%. The exact figure is 12.25%, and the rule of 72 is within a quarter point anywhere from about 6% to 12%. Give 12% first, then say it is a shade over, which shows you know the rule is an approximation.
The relationship
$(1+r)^6 = 2 \;\Rightarrow\; r = 2^{1/6} - 1 \approx 12.2\%$
r the annual return
6 years to double
What it says in wordsThe annual return is the sixth root of two, less one.
Portfolio managers ask this because clients think in multiples and managers think in annual rates. Being able to move between the two in your head is the whole skill.
Where candidates lose it
The fast wrong answer is 48 years, eight times six, which treats the multiple as a count of periods. It is the same straight-line habit that makes people underestimate what compounding does over a career.
The quieter loss is saying 12% and stopping. Give 12% from the rule of 72, then correct it to about 12.2%, so the interviewer sees you know where the shortcut comes from.
What the interviewer asks next
How long to reach 10 times at the same rate?
If fees take 1.5% a year off that return, how long does one doubling take?
Why does the rule of 72 get worse at very high rates?
078You bought a stock at Rs 800. It now trades at Rs 500, and your updated estimate of fair value is Rs 450. Do you hold it until it gets back to Rs 800?Behavioural and decision trapsWarm upAsset managementWealth management
Try it first
Which numbers belong in the decision?
Show the worked solution
No. The Rs 800 you paid does not enter the decision; on your own numbers the stock is worth less than it trades for. Getting back to Rs 800 needs a 60% rise. Your own value of Rs 450 sits 10% below the Rs 500 price. Holding it is a fresh decision to own an overpriced stock.
Why does the purchase price feel like it matters?
Someone who paid Rs 2,000 for a concert ticket will go out in a storm with a fever rather than waste it, although the money is gone either way. The only question left is whether the evening is worth it now. Money already spent is sunk: it is the same whatever you do next, so it cannot help choose what to do next. The purchase price of a stock is exactly that kind of number.
The Rs 800 purchase price sits outside the decision, and the 60% rise needed to reach it is irrelevant; the live comparison is today's price of Rs 500 against your updated value of Rs 450, which says the stock is overpriced.
How do you say it so it sounds like judgement rather than a slogan?
Turn the question round. If you had Rs 500 in cash today and no history with this stock, would you buy it at a price above your own value? If the answer is no, holding it is the same bet in disguise. The anchoringLeaning on a reference number, here the purchase price, when judging something that does not depend on it. pull comes from the Rs 800, and the disposition effect, holding losers to avoid booking the loss, is a well documented habit among professional managers as well as individuals.
Then give the honest limits. Your Rs 450 is an estimate, so ask how confident you are and whether anything has changed that the price already reflects. A booked loss can also offset gains for tax, which is a reason to act, not to wait. Replacement matters too: the money should go to whatever has the best expected return per unit of risk, which may or may not be this stock.
Where candidates lose it
The trap is answering the question as asked, with a view on how long the stock might take to get back to Rs 800. That accepts the anchor, and the interviewer is testing whether you reject it.
The opposite slip is a flat sell with no reasoning. Say the sunk cost point, give the would-I-buy-it-today test, then note that your Rs 450 value is an estimate that deserves a second look.
What the interviewer asks next
Your value was Rs 900 instead of Rs 450. What changes?
Why do managers hold losers longer than winners, and how would you guard against it in your own process?
How would you explain this to a client who refuses to sell below cost?
079An Indian investor holds a US stock that rises 8% in dollars over a year, while the rupee weakens 5% against the dollar. What is the investor's return in rupees?Currency and global returnsWarm upGlobal investingIndian wealth management
Try it first
Pick the rupee return.
Show the worked solution
About 13.4% in rupees. The stock turns each dollar into 1.08 dollars, and each dollar now buys 5% more rupees, so each rupee invested becomes 1.08 x 1.05, or 1.134 rupees. The extra 0.4% over simple addition is the currency gain earned on the stock gain.
Does a weaker rupee help or hurt this investor?
A student in India whose parents send a fixed dollar allowance from abroad is better off when the rupee weakens: the same dollars convert into more rupees. An Indian investor holding dollar assets is in the student's position, so a weaker rupee adds to the return. Say the direction first, because half the candidates who get this wrong get the sign wrong, not the arithmetic.
The stock's 8% dollar gain and the rupee's 5% fall add to 13%, and the extra 0.4% comes from the currency gain applying to the grown dollar amount, taking the rupee return to 13.4%.
Where does the extra 0.4% come from?
Follow Rs 100. At the start it buys a dollar amount; a year later that amount has grown 8%. The 5% currency gain is earned on the grown amount, not the original one, so the currency also earns 5% on the 8% profit, which is 0.4%. For small moves the cross term hardly matters; for a 30% stock gain with a 10% currency move it is 3 points.
The relationship
$1 + r_{Rs} = (1 + r_{\$})(1 + r_{FX}) = 1.08 \times 1.05 = 1.134$
r_$ the stock's return in dollars, 8%
r_FX the change in rupees per dollar, 5%
r_Rs the return measured in rupees
What it says in wordsThe home currency return is the local return compounded with the currency return.
Run it the other way as a check. If the rupee had strengthened 5% instead, the return would be 1.08 x 0.95, less one, which is 2.6%: a good stock year mostly erased by currency. That is why global allocations report returns in both currencies.
Where candidates lose it
The costly slip is the sign: treating a weaker rupee as a loss and answering 3%. It shows the candidate is thinking about the rupee's health rather than about which currency the investor owns.
The smaller slip is 13% from simple addition. Say 13.4%, and name the cross term, so the interviewer hears that you know returns multiply.
What the interviewer asks next
What if the rupee strengthens 5% instead?
How would the investor hedge the currency, and what would that cost or earn?
Over ten years, why might currency matter more than the one-year cross term suggests?
080A fund turns over 120% of its portfolio a year, and each round trip, selling a holding and buying its replacement, costs 40 basis points. What is the annual drag on returns from trading?Funds, ETFs and implementationWarm upPortfolio implementationMutual funds
Try it first
What is the annual trading drag?
Show the worked solution
About 0.48% a year. Turnover of 120% means the fund sells and replaces the equivalent of its whole portfolio 1.2 times a year. At 40 basis points per round trip, the drag is 1.2 x 40, or 48 basis points. On a Rs 1,000 crore fund that is Rs 4.8 crore a year, taken from returns rather than charged as a fee.
What exactly is a round trip, and why count it that way?
Trading in a car costs you twice: the dealer pays less than it is worth when you sell, and charges more than it is worth when you buy the next one. A fund switching one stock for another pays the same two-sided cost, so the natural unit is the round trip: one sale and one purchase together. Reported turnover is usually the lesser of purchases and sales over average assets, which counts each switch once, so 120% maps to 1.2 round trips.
Turnover of 120% is 1.2 round trips a year at 40 basis points each, a 48 basis point drag; beside an assumed 1.00% expense ratio, the investor's true cost is 148 basis points, and the trading part never appears on the factsheet.
The relationship
$\text{drag} = \text{turnover} \times \text{cost per round trip} = 1.2 \times 40 = 48 \text{ bp}$
turnover portfolio replaced per year, 120%
cost per round trip spread, market impact, brokerage and taxes on a sale and a purchase, 40 bp
What it says in wordsMultiply how many times the portfolio is replaced by what one replacement costs.
Why does this matter if the expense ratio looks fine?
The expense ratio covers the manager's fee and running costs. Trading costs are paid inside the portfolio, through worse prices and brokerage, so they reduce the return without ever appearing in the expense ratio. A fund with a modest fee and high turnover can cost more in total than a pricier fund that trades little. For a Rs 1,000 crore fund, 48 basis points is Rs 4.8 crore a year.
Say the limitation too. The 40 basis points is an average; impact rises with trade size, so a fund that grows while keeping the same turnover usually pays more per round trip, not less.
Where candidates lose it
The common slip is doubling the answer to 96 basis points on the grounds that turnover counts both the buy and the sell. The usual definition already counts each switch once, and the cost per round trip already includes both legs.
The second slip is saying the cost is already in the expense ratio. It is not, and the interviewer asks precisely to see if you know where trading costs hide.
What the interviewer asks next
The fund doubles in size and keeps the same turnover. What happens to cost per round trip?
How would you estimate a fund's trading costs from its published numbers?
Why do index funds usually have far lower turnover than active funds?

8	the annual coupon on 100 of face value
108	the final coupon plus the principal
1.07	one plus the market yield

V_t	the NAV at year-end t
max over s up to t	the running peak, the highest NAV seen so far

k	the number of weighings
n	the number of bags, one of which is light
3	outcomes of one weighing: left light, right light, balanced

M	the money multiple, cash back over cash in
n	the years held, with one cash flow in and one out

Try it first

What does pricing a bond actually mean?

Why must a bond with a high coupon trade above par?

Where candidates lose it

What the interviewer asks next

Try it first

Measured from where?

Why does the recovery to 120 not end the drawdown?

Where candidates lose it

What the interviewer asks next

Try it first

Why is halving the pile the wrong instinct?

How do you prove two is the minimum?

Where candidates lose it

What the interviewer asks next

Try it first

Why is the simple average so far off?

How do you get there in your head?

Where candidates lose it

What the interviewer asks next

Try it first

Why does money leaving not lower the NAV?

So what does a redemption change?

Where candidates lose it

What the interviewer asks next

Try it first

Why turn duration into rupees at all?

Where does the straight-line answer stop being right?

Where candidates lose it

What the interviewer asks next

Try it first

Why count doublings instead of dividing?

How do you get the annual return without a calculator?

Where candidates lose it

What the interviewer asks next

Try it first

Why does the purchase price feel like it matters?

How do you say it so it sounds like judgement rather than a slogan?

Where candidates lose it

What the interviewer asks next

Try it first

Does a weaker rupee help or hurt this investor?

Where does the extra 0.4% come from?

Where candidates lose it

What the interviewer asks next

Try it first

What exactly is a round trip, and why count it that way?

Why does this matter if the expense ratio looks fine?

Where candidates lose it

What the interviewer asks next