Question

You are going to invest in a stock mutual fund with a front-end load of 5 percent and an expense ratio of 1.57 percent. You also can invest in a money market mutual fund with a return of 2.6 percent and an expense ratio of 0.30 percent. If you plan to keep your investment for 2 years, what annual return must the stock mutual fund earn to exceed an investment in the money market fund? What if your investment horizon is 7 years? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)

**Annual return**

**2 years%**

**7 years%**

Answer #1

Money market fund net return= Money market fund return - expense ratio = 2.6%-0.3%=2.3%

Stock mutual fund expenses = front-end load+ expense ratio = 5%+1.57%=6.57%

For the stock mutual fund to generate net return of money market fund, it has to cover the mutual fund's expenses and over and above that , it has to generate the return.

In other words, it has to cover 6.57% of expenses and generate 2.3% of return which is a total of 8.87% return p.a , irrespective of the time horizon of the investment. So to beat the money market net return, a min of 8.88% p.a is required.

Annual return for 2 years and 7 years is 8.88% p.a

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