Question

In: Finance

You are considering an investment in a mutual fund with a 1.9% load and expense ratio...

You are considering an investment in a mutual fund with a 1.9% load and expense ratio of .5%. You can invest instead in a bank CD paying 6% interest. If you plan to invest for 5 years, what annual gross 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.

Round your answer to 4 decimal places. For example, if your answer is 3.205%, then please write down 0.0321.

Solutions

Expert Solution

Sol:

Here, ($1 - % of load) x ( 1+ interest rate or gross rate of return(i) - expense ratio)number of year investment > Bank interest rate number of year investment

If you invest amount for a period of 5 years, then portfolio return would be:

($1- $0.019) x (1+ i - 0.005)5 > (1+0.06)5

$0.981 x (1+ i - 0.005)5 > 1.3382

(1+ i - 0.005)5 > 1.3641

1 + i - 0.005 > 1.0641

1 + i > 1.0691

i = 1.0691-1

i =0.0691 or 6.91%

annual gross rate of return = 0.0691

Therefore, We see gross rate of return this case greater than bank interest rate.


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