EBK 3N3-EBK: FINANCIAL ANALYSIS WITH MI
8th Edition
ISBN: 9780176914943
Author: Mayes
Publisher: VST
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Upon starting you new job after graduation, you’ve been confronted with selecting investment for your 401K retirement plan. You have four choices for investing your money:
• A money market fund which has historically returned about 5% per year.
• A long-term bond which has earned an average annual rate of return of 8%
• A conservative common stock fund which has earned 10% per year.
• An aggressive common stock fund which has historically earned 14% per year.
a. If you were to contribute $3,600 per year (at the end of each year) for the next 35 years, how much would you accumulate in each of the above funds? (Use FV function)
b. Recalculate part a in a separate excel worksheet (same excel file), but now change your worksheet appropriately so that it allows for non-annual investments (monthly, weekly, quarterly etc.). The annual investment is still $3,600. For example, when you invest quarterly, you invest $900 (=$3,600/4) four times a year. What is the FV in each fund?
c. In the…
Suppose you have recently accepted a new job and are setting up your retirement allocations within the firm's 401k plan. The plan options contain two risky mutual funds, A and B. You may assume that all fees are the same across the two funds. Fund A has an expected return of 6% and the standard deviation of returns is 12%. Fund B has an expected return of 7% and the standard deviation of returns is 15%. The correlation between returns on the two funds is 0. The plan also contains a Treasury fund which provides a risk-free return of 3%.
A Suppose you can only invest in one of the two risky mutual funds (A or B), but can combine it with the Treasury fund in any proportions you wish. Which of the two mutual funds would you choose and why
B Maintaining the restrictions on your investment choices from the last question, what is the best expected return you could achieve if you set up a portfolio with a standard deviation of returns equal to 10%? (Please express your answer in percentage…
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- The following table shows the average returns for some of the largest mutual funds commonly found in retirement plans. (Assume end-of-month deposits and withdrawals and monthly compounding, and assume that the quoted rate of return continues indefinitely.) How much would be accumulated after 25 years in a retirement account invested entirely in the Vanguard 500 stock fund with payments of $280 per month? HINT [See Quick Example 1.] (Round your answer to the nearest cent.) SA $ Mutual Fund Fidelity Growth Company Vanguard 500 Index PIMCO Total Return Vanguard Total Bond Market Index Type Stock fund Stock fund Bond fund Bond fund Rate of 30.31% 17.98% 3.63% 3.10% Returnarrow_forwardSuppose that at the beginning of 2004 you invested $10,000 in the Stivers mutual fund and $5000 in the Trippi mutual fund. The value of each investment at the end of each subsequent year is provided in the table below. Which mutual fund performed better ? Year Stivers Trippi 2004 11,000 5,600 2005 12,000 6,300 2006 13,000 6,900 2007 14,000 7,600 2008 15,000 8,500 2009 16,000 9,200 2010 17,000 9,900 2011 18,000 10,600arrow_forwardYou are considering an investment in a mutual fund with a 5% load and an expense ratio of 0.75%. You can invest instead in a bank CD paying 3% interest. Required: a. If you plan to invest for 3 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. What annual rate of return must the fund portfolio earn if you plan to invest for 6 years to be better off in the fund than in the CD? c. Now suppose that instead of a front-end load the fund assesses a 12b-1 fee of 0.50% 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? Note: Do not round intermediate calculations. Round your answers to 2 decimal places.arrow_forward
- You are considering an investment in a mutual fund with a 5% load and an expense ratio of 0.5%. You can invest instead in a bank CD paying 3% interest. Required: a. If you plan to invest for 4 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. What annual rate of return must the fund portfolio earn if you plan to invest for 6 years to be better off in the fund than in the CD? c. Now suppose that instead of a front-end load the fund assesses a 12b-1 fee of 0.75% 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? Note: Do not round intermediate calculations. Round your answers to 2 decimal places. a. Annual rate of return b. Annual rate of return c. Annual rate of return % % %arrow_forwardAssume that investing $500 in a fund today will give you a return of $530 a year later. On the other hand, your bank can give you a rate of interest of 7.5% compounded annually. Will you choose to invest in the fund?arrow_forwardYou 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?arrow_forward
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