Answer:
a. r > 8.69%
b. r > 7.225
Explanation:
Missing question <em>"b. hat 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?"</em>
<em />
Mutual fund wealth index after N years = (1 - front load)*(1+r-expenses)^N
CD wealth index after N years = (1+rate)^N
a. Investment for 2 years
(1 - front load)*(1+r-expenses)^N = (1+rate)^N
(1 - 0.04)*(1+r-0.005)^2 = (1+0.06)^2
0.96*(1+r-0.005)^2 = 1.1236
(1+r-0.005)^2 = 1.17041667
<em>We remove square from both sides</em>
(1+r-0.005) = 1.17041667^(1/5)
(1+r-0.005) = 1.08185797
r = 1.08185797 - 1 + 0.005
r = 0.0869
r = 8.69%
r > 8.69%
b. If investment is for 6 years
(1 - front load)*(1+r-expenses)^N = (1+rate)^N
(1 - 0.04)*(1+r-0.005)^6 = (1+0.06)^6
0.96*(1+r-0.005)^6 = 1.41851911
(1+r-0.005)^6 = 1.47762408
<em>We remove square from both sides</em>
(1+r-0.005) = 1.47762408^(1/6)
(1+r-0.005) = 1.06723648
r = 1.06723648 - 1 + 0.005
r = 0.07223648
r = 7.22%
r > 7.225
