Final answer:
To determine the required earning percentage of the mutual fund for Mr. X to receive a 10% return, we account for the 1.5% recurring expenses, leading to a simplified approximate answer of at least 11.5%. However, the correct answer, which also considers the initial 5% expense spread over time, is closest to option (c) 12.63%. Therefore, the correct option is C.
Step-by-step explanation:
In order to find out how much the mutual fund should earn to provide Mr. X with a return of 10 percent, we need to take into account the initial and recurring expenses of the fund. Since the initial expenses are 5 percent, the invested amount is essentially reduced by 5 percent immediately. Furthermore, the annual recurring expenses are 1.5 percent, which means the returns need to be 1.5 percent higher than the desired 10 percent to compensate for these expenses. Therefore, the mutual fund needs to earn:
10% (desired return) + 1.5% (annual expenses) + 5% (initial expenses amortized over many years, however this can be considered negligible in the short term) = 11.5% (at a minimum short-term approximation).
Since this is a simplified calculation to demonstrate the concept, and the exact answer might involve a more complex financial calculation where the 5 percent initial expenses are amortized over the period, we can say that the correct answer is closest to (c) 12.63% which is higher than our simplified approximation, accounting for the impact of initial expenses over time.