What is the logic behind it?
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1. ADV of the smallest cap stock:
Market cap of the smallest shares is 0.005*10Trillion = 5B
ADV = 5B*0.01 = 50M
2. Liquidity constraint of the fund:
0.03*ADV = 0.03*50M = 1.5M
On the other side, maximum weight of the smallest cap share that the fund can hold is 2.5% of AUM.
This means if 2.5% of AUM is greater than 1.5M, liquidity constraint of the fund will get breached and the position cannot be implemented.
Thus, Maximum AUM to be able to include this small cap share is the AUM, 2.5% of which is 1.5M i.e., 1.5M/2.5% = 60M
Here I think some maths is wrong.
10 trillion is 10,000 billion & 0.5% of 10,000 is 50bn. Here they have taken 5bn. Can you check once if I’m missing something?
can you please share the full question and be specific about your doubt?