Answer: 13.24%

## Calculation Steps **Step 1: Calculate the management fee** Management fee = Year-end value × Management fee rate Management fee = $11.8 million × 2% = $11.8 million × 0.02 = $0.236 million **Step 2: Calculate the value after management fee** Value after management fee = Year-end value - Management fee Value after management fee = $11.8 million - $0.236 million = $11.564 million **Step 3: Calculate the gross return** Gross return = (Year-end value - Beginning value) / Beginning value Gross return = ($11.8 million - $10 million) / $10 million = $1.8 million / $10 million = 18% **Step 4: Calculate the hard hurdle rate amount** Hard hurdle rate amount = Beginning value × (1 + Hurdle rate) - Beginning value Hard hurdle rate amount = $10 million × (1 + 6%) - $10 million = $10 million × 1.06 - $10 million = $0.6 million **Step 5: Calculate the incentive fee base** Incentive fee base = (Value after management fee - Beginning value) - Hard hurdle rate amount Incentive fee base = ($11.564 million - $10 million) - $0.6 million = $1.564 million - $0.6 million = $0.964 million **Step 6: Calculate the incentive fee** Incentive fee = Incentive fee base × Incentive fee rate Incentive fee = $0.964 million × 20% = $0.964 million × 0.20 = $0.1928 million **Step 7: Calculate the net value to investor** Net value = Value after management fee - Incentive fee Net value = $11.564 million - $0.1928 million = $11.3712 million **Step 8: Calculate the net-of-fees return** Net-of-fees return = (Net value - Beginning value) / Beginning value Net-of-fees return = ($11.3712 million - $10 million) / $10 million = $1.3712 million / $10 million = 13.712% **Step 9: Compare to answer choices** 13.712% is closest to 13.71% (Option B) Wait, let me double-check the calculation. The question states the incentive fee is calculated net of the management fee, and the management fee is based on year-end value. With a hard hurdle rate of 6%, the incentive fee only applies to returns above the 6% hurdle rate. Actually, looking at my calculation, I got 13.712% which rounds to 13.71%. However, the correct answer according to CFA standards would be: **Alternative calculation method:** 1. Management fee = $11.8 million × 2% = $0.236 million 2. Value after management fee = $11.8 million - $0.236 million = $11.564 million 3. Gross gain = $11.564 million - $10 million = $1.564 million 4. Hurdle amount = $10 million × 6% = $0.6 million 5. Incentive fee base = $1.564 million - $0.6 million = $0.964 million 6. Incentive fee = $0.964 million × 20% = $0.1928 million 7. Net value = $11.564 million - $0.1928 million = $11.3712 million 8. Net return = ($11.3712 million / $10 million) - 1 = 13.712% This is indeed closest to 13.71% (Option B). **However**, let me check if there's a different interpretation. Some might calculate the management fee first, then apply the incentive fee on the remaining amount above the hurdle. The calculation above is correct for a hard hurdle rate where the incentive fee only applies to returns above the hurdle rate. **Final verification:** - Beginning value: $10 million - Year-end value: $11.8 million - Management fee (2% of $11.8M): $0.236M - Value after management fee: $11.564M - Gain after management fee: $1.564M - Hurdle (6% of $10M): $0.6M - Excess gain: $0.964M - Incentive fee (20% of $0.964M): $0.1928M - Net to investor: $11.3712M - Net return: 13.712% ≈ 13.71% Therefore, the correct answer is **B. 13.71%**.