Question

Loaded-Up Fund charges a 12b-1 fee of 1.00% and maintains an expense ratio of 0.50%. Economy Fund charges a front-end load of 3.0%, but has no 12b-1 fee and an expense ratio of 0.25%. Assume the rate of return on both funds’ portfolios (before any fees) is 12% per year. How much will an investment in each grow to after 1 year?

Answer 1

The complete question is found in the attachment

Step-by-step explanation:

End Value of Investment = Investment * (1 - Front-end load) * (1 + r - True Expense Ratio)T

Loaded-up fund:

True Expense Ratio = Expense Ratio + 12b-1 fee = 0.5% + 1% = 1.5%

a). 1-year:

End Value of Investment = $1,000 * (1 - 0) * (1 + 0.06 - 0.015)1 = $1,000 * 1 * 1.045 = $1,045.00

b). 3-years:

End Value of Investment = $1,000 * (1 - 0) * (1 + 0.06 - 0.015)3 = $1,000 * 1 * 1.1412 = $1,141.17

c). 10-years:

End Value of Investment = $1,000 * (1 - 0) * (1 + 0.06 - 0.015)10 = $1,000 * 1 * 1.5530 = $1,552.97

Expense Fund:

a). 1-year:

End Value of Investment = $1,000 * (1 - 0.03) * (1 + 0.06 - 0.0025)1

= $1,000 * 0.97 * 1.0575 = $1,025.78

b). 3-years:

End Value of Investment = $1,000 * (1 - 0.03) * (1 + 0.06 - 0.0025)3

= $1,000 * 0.97 * 1.1826 = $1,147.13

c). 10-years:

End Value of Investment = $1,000 * (1 - 0.03) * (1 + 0.06 - 0.0025)10

= $1,000 * 0.97 * 1.7491 = $1,696.58