In: Finance
You are considering an investment in a mutual fund with a 5%
load and an expense ratio of 1%. You can invest in a bank CD paying
5% interest.
a. If you plan to invest for 6 years , what annual rate of return
must the fund portfolio earn for you to be better off in the fund
than in the CD? Does load fee reduce your effective investment
amount? Why?
b. 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 return. explain how
investment horizon and load fee affects annual rate of return
.
c. Now suppose that instead of a front-end load the fund assesses a
12b-1 fee of 1.50% 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 12b-1 fee reduce your effective investment amount ?
Why?