Chapter 4, Problem 26PS

Summary Introduction

(A)

Adequate information:

The investor wants to make an investment with an expense ratio of 0.5% and front end load of 4% in the mutual fund. The interest paid by the bank certificate of deposit accounts for 6%.

To calculate:

The annual rate of return that must be earned by the fund portfolio with the investment horizon of 2 years

Introduction:

Rate of return refers to the ratio of loss or profit ascertained in the financial year with respect to the investment which is generally expressed in percentage of decrease or increase in the investment's value during the given period of time.

Summary Introduction

(B)

To calculate:

The annual rate of return that must be earned by the fund portfolio with the investment horizon of 6 year

Introduction:

Rate of return refers to the ratio of loss or profit ascertained in the financial year with respect to the investment which is generally expressed in percentage of decrease or increase in the investment's value during the given period of time.

Summary Introduction

(C)

To calculate:

The annual rate of return that must be earned by the fund portfolio if there exist 12b-1 fee of 0.75% instead of the front end load

Introduction:

A 12b-1 fee stands to be the annual distribution or makreting fee levied on the mutual fund. It is considered as an operational charges which is included under the expense ratio of the firm. It ranges between 0.25% to 1% of the net asset of the fund.