Question

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 is 11 years? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)

Answer 1

Answer :- Minimum Stock mutual fund earning In case of 2 years = 7.17%

Minimum Stock mutual fund earning in case of 11 years = 5.94%

Calculation :-

Return for stock mutual fund = (1 - front load) * ( 1 + return - expense) * Years

Return for money market mutual fund = ( 1 + return - expense ) * Years

So Minimum stock mutual fund should earn to exceed money market in 2 and 11 years will be =

(1 - front load) * ( 1 + return - expense) * Years = ( 1 + return - expense) * Years

(1 - 0.03) * ( 1 + return - 0.015) * 2 or 11 = ( 1 + 0.022 - 0.0030 ) * 2 or 11

By solving,

Return ( in case of 2 years) = 7.17%

Return ( in case of 11 years) = 5.94%