You are considering an investment in a mutual fund with a 4% load and an expense ratio of .5%. You can invest instead in a bank CD paying 6% interest.a. If you plan to invest for 2 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 6 years? Why does your answer change?c. Now suppose that instead of a front-end load the fund assesses a 12b-1 fee of .75% 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 time horizon?

EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN:9781337514835
Author:MOYER
Publisher:MOYER
Chapter8: Analysis Of Risk And Return
Section: Chapter Questions
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You are considering an investment in a mutual fund with a 4% load and an expense ratio of .5%. You can invest instead in a bank CD paying 6% interest.
a. If you plan to invest for 2 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 6 years? Why does your answer change?
c. Now suppose that instead of a front-end load the fund assesses a 12b-1 fee of .75% 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 time horizon?

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