Question

You are considering an investment in a mutual fund with a 4% front-end load and an...

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 two 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:  

Homework Answers

Answer #1

Solution:

Assuming, required annual rate of return is r

After 2 years:

i)Each dollar invested in a fund with a 4% load and a portfolio return equal to r will grow to;

=$1(1-0.04)*(1+r-0.0110)^2

ii)Each dollar invested in the bank CD will grow to;

=$1*(1+0.06)^2

If the mutual fund is to be better investment,then the portfolio return(r) must satisfy:

=$0.96(1+r-0.110)^2>1.06^2

=$0.96(1+r-0.0110)^2>1.1236

=(1+r-0.011)^2>1.1704

=1+r-0.011>1.0819

=1+r>1.0929

r>0.0929

therefore,annual rate of return must be greater than 9.29%

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
You are considering an investment in a mutual fund with a 4% front-end load and an...
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...
You are considering an investment in a mutual fund with a 4% load and an expense...
You are considering an investment in a mutual fund with a 4% load and an expense ratio of 0.5%. You can invest instead in a bank CD paying 6% interest. a. If you plan to invest for two 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. b. How does your answer change if you plan to invest for six...
You are considering an investment in a mutual fund with a 4% load and an expense...
You are considering an investment in a mutual fund with a 4% load and an expense ratio of 0.5%. You can invest instead in a bank CD paying 6% interest. a. If you plan to invest for two 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. Round your answer to 2 decimal places.) b....
You are considering an investment in a mutual fund with a 5% load and an expense...
You are considering an investment in a mutual fund with a 5% load and an expense ratio of 0.85%. You can invest instead in a bank CD paying 7% interest. a. If you plan to invest for two 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. Round your answer to 2 decimal places.) annual...
You are considering an investment in a mutual fund with a 4% load and an expense...
You are considering an investment in a mutual fund with a 4% load and an expense ratio of 0.5%. You can invest instead in a bank CD paying 6% interest. ) You are considering an investment in a mutual fund with a 4% load and an expense ratio of 0.5%. You can invest instead in a bank CD paying 6% interest. ) You are considering an investment in a mutual fund with a 4% load and an expense ratio of...
You are considering an investment in a mutual fund with a 4% load and an expense...
You are considering an investment in a mutual fund with a 4% load and an expense ratio of 0.5%. You can invest instead in a bank CD paying 6% interest. Now suppose that instead of a front-end load the fund assesses a 12b-1 fee of 0.5% per year. What annual rate of return must the fund portfolio earn for you to be better off in the fund than in the CD? Does your answer in this case depend on your...
You are considering an investment in a mutual fund with a 5% load and expense ration...
You are considering an investment in a mutual fund with a 5% load and expense ration of 0.5%. You can invest in a bank CD paying 3% interest. A. If you plan to invest for 4 years, what annual rate of return must the fund portfolio earn fot you to be better offin the fund than in the CD? Assume annual compounding of returns.(Do not round intermediate calculations. Round your answer to 2 decimal places.) Annual rate of return__________% B....
You are going to invest in a stock mutual fund with a front-end load of 5...
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...
You are going to invest in a stock mutual fund with a front-end load of 3...
You are going to invest in a stock mutual fund with a front-end load of 3 percent and an expense ratio of 1.5 percent. You also can invest in a money market mutual fund with a return of 2.2 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...
You have $10,000 to invest and are considering two mutual funds: No-load Fund and Economy Fund....
You have $10,000 to invest and are considering two mutual funds: No-load Fund and Economy Fund. The No-load Fund charges a 12b-1 fee of 1% and maintains an expense ratio of 0.50%. The Economy Fund charges a front-end load of 4%, but has no 12b-1 fee and an expense ratio of 0.50%. Assume that the rate of return on both funds’ portfolios (before any fees) is 8% per year. If you plan to buy and hold for three years, which...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT