Final answer:
A mutual fund's expense ratio is calculated by dividing its operating expenses by its average annual net assets. The provided question and example link the concept of expense ratios to the real-life impact on investment returns, demonstrating how administrative fees can affect the growth of an individual's savings over time.
Step-by-step explanation:
A mutual fund's expense ratio is calculated by dividing its operating expenses by its average annual net assets. This measure helps investors understand what percentage of their investment in a mutual fund will go towards covering the fund's annual operating costs. To answer the question, the expense ratio is found by dividing the mutual fund's expenses by its (D) average annual net assets.
Exploring a related concept, when individuals invest in mutual funds or retirement funds in the stock market, they are subject to different rates of return due to factors like administrative fees. Using the provided example, let us calculate how much more Alexx, who invests directly and earns 5% a year, will have compared to Spenser, who uses a retirement fund and earns 4.75% after administrative fees, over a period of 30 years.
For Alexx: Final amount = $5,000 × (1 + 0.05)^{30}
For Spenser: Final amount = $5,000 × (1 + 0.0475)^{30}
After carrying out the calculations, we subtract Spenser's final amount from Alexx's to find the difference after 30 years.