Question

Loaded-Up Fund charges a 12b-1 fee of 1% and maintains an expense ratio of 0.75%. Economy Fund charges a front-end load of 2%, 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 9% per year.a. how much will an investment of $100 in each fund grow to after 1 year? b. how much will an investment of $100 in each fund grow to after 3 years? c. how much will an investment of $100 in each fund grow to after 10 years?

Answer 1

Let's presume $100 to be a hypothetical investment.

The final amount of the investment will be equivalent to I [ 1-front-end load ] [ 1 + r-true expense ratio]T Loaded-Up: the 12b-1 operating expense charge will be added to the actual expense ratio: expense ratio + (12b-1 fee) = 1% + 0.75% = 1.75%.

Therefore with that in mind.

a. Year 1 = $100 (1 + 0.06 - 0.0175) = $104.25 b. Year 3 = $100 (1 + 0.06 - 0.0175)3 = $113.30 c. Year 10 = $100 (1 + 0.06 - 0.0175)10 = $151.62

Economy fund:

a. Year 1 = $100 0.98 (1 + 0.06 - 0.0025) = $103.64 b. Year 3 = $100 0.98 (1 + 0.06 - 0.0025)3 = $115.90 c. Year 10 = $100 0.98 (1 + 0.06 - 0.0025)10 = $171.41