Question

You are considering an investment in a mutual fund with a 4%
front-end load and an expense ratio of 1.1%. You can invest instead
in a bank CD paying 6% interest. If you plan to invest for six
years, what annual rate of return must the fund portfolio earn for
you to be better off in the fund than in the CD? Assume annual
compounding of returns **(Do not round intermediate
calculations. Enter your answer as a decimal rounded to four
decimal places.)**

Annual rate of return:

Answer #1

rate positvely ..

Each dollar in mutual fund will earn over the 6 year period | |||||

1*(1-4%)*(1+r%-1.3%)^2 | 1.06^2 | ||||

Solving the equation we have | |||||

0.96*(1+r%-1.3%)^2 | 1.1236 | ||||

(1+r%-1.3%)^2 | 1.170417 | ||||

(1+r%-1.3%) | 1.081858 | ||||

r= | 9.49% | ||||

Each dollar in mutual fund will earn over the 6 year period | |||||

1*(1-4%)*(1+r%-1.1%)^6 | 1.06^6 | ||||

Solving the equation we have | |||||

0.96*(1+r%-1.1%)^6 | 1.418519 | ||||

(1+r%-1.1%)^6 | 1.477624 | ||||

(1+r%-1.1%) | 1.067236 | ||||

r= | 7.82% | ||||

Therefore return must be greater than |
7.82% |
||||

ans = |
0.0782 |
||||

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