You are going to invest in a stock mutual fund with a 4.S percent front-end load

Question

You are going to invest in a stock mutual fund with a 4.S percent front-end load and a 1.55 percent expense ratio You also can invest in a money market mutual fund with a 2.5 percent return and an expense ratio of.40 percent H you plan to keep your investment for 2 years, what annual return must the stock mutual fund cam to exceed an investment in the money market fund? What if your investment horizon is 8 years? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places. Omit the "%" sign in your response.)

Explanation / Answer

For 2 years Assune Invested $100 Money Market   Maturity value =100*1.025^2        105.06 Less 0.4% expense ratio=           0.420 Net Value        104.64 Net Return =             4.64 Assume MF return=k Invested in MF =100 Front load @4.5% =4.5 Invested amount =95.5 So Maturity value =95.5(1+k)^2 Expense ratio= 0.4% After expense maturity value MF =95.5(1+k)^2*0.996 To Equal Money Market return   So , 95.5(1+k)^2*0.996=104.64 (1+k)^2=1.10 k =4.9 % approximate So MF return needs to be > 4.9% to exceed return from money market return   For 8 years Invested $100 Money Market   Maturity value =100*1.025^8        121.84 Less 0.4% expense ratio=           0.487 Net Value        121.35 Net Return =           21.35 Assume MF return=k Invested in MF =100 Front load @4.5% =4.5 Invested amount =95.5 So Maturity value =95.5(1+k)^8 Expense ratio= 0.4% After expense maturity value MF =95.5(1+k)^8*0.996 To equal money market return So , 95.5(1+k)^8*0.996=121.35 (1+k)^8=1.2758 k =3.09 % approximate So MF return needs to be > 3.09% to exceed return from money market return

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