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%**

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