You are choosing between the following investments that all have the same risk.
ID: 2650778 • Letter: Y
Question
You are choosing between the following investments that all have the same risk. All have the same expected return (before fees) except for the Star fund which is run by an investment advisor who regularly beats the market and earns a higher return. Calculate the amount of cash you will have if you invest $10,000 today and hold your investment for (a) 1 year, (b) 5 years, (c) 10 years and (d) 20 years before you close out the position. (Note: be sure to deduct expenses as appropriate and to close out the position at the end).
Investment Fees E(r)(before fees)
A Star Fund 3% front-end load; 1.75% annual fee 9.5% annually
B Mutual Fund no load; 1% annual fee 8% annually
C ETF $7 per trade; .15% annual fee 8% annually
D 10 stock portfolio $7 for each trade; no other fees 8% annually
Explanation / Answer
For A Investment amount $10,000 Expected return 9.50% Holding period 1 year Front end load 3% Annual Fee 1.75% Net Amount invested would be Investment amount minus front end load minus annual fee 10000-(10000*3%)-(10000*1.75%) =$9525 Expected retun 9.50% Total cash you will have after 1 year would be 9525*(1+9.25%) 10406.0625 For B Investment amount $10,000 Expected return 8.00% Holding period 5 year Front end load 0% Annual Fee 1.00% Net amount invested Investment amount minus front end load minus annual fee 10000-0-(10000*1%) 9900 Future value at the end of the year Amount invested Fund value (A+(1+8%) Annual Chages Net fund value 1 9900 10692 106.92 10585.08 2 10585.08 11431.8864 114.318864 11317.56754 3 11317.56754 12222.97294 122.2297294 12100.74321 4 12100.74321 13068.80267 130.6880267 12938.11464 5 12938.11464 13973.16381 139.7316381 13833.43217 Net fund available after 5 year 13833.43217 For C- ETF Investment amount $10,000 Expected return 8.00% Holding period 10 Front end load $7 per trade Annual Fee 15.00% Net amount invested Investment amount minus front end load minus annual fee 10000-7-(10000*15%) 8493 Future value at the end of the year Amount invested Fund value (A+(1+8%) Annual Chages Net fund value 1 8493 9172.44 1375.866 7796.574 2 7796.574 8420.29992 1263.044988 7157.254932 3 7157.254932 7729.835327 1159.475299 6570.360028 4 6570.360028 7095.98883 1064.398324 6031.590505 5 6031.590505 6514.117746 977.1176619 5537.000084 6 5537.000084 5979.960091 896.9940136 5082.966077 7 5082.966077 5489.603363 823.4405045 4666.162859 8 4666.162859 5039.455887 755.9183831 4283.537504 9 4283.537504 4626.220505 693.9330757 3932.287429 10 3932.287429 4246.870423 637.0305635 3609.83986 Net fund available after 10 year 3609.83986 For D- 10 stock portfolio Investment amount $10,000 Expected return 8.00% Holding period 20 Front end load $7 per trade for 10 stock Annual Fee 0.00% Net amount invested Investment amount minus front end load minus annual fee 10000-(7*10)-0 9930 Future value at the end of the year Amount invested Fund value (A+(1+8%) Annual Chages Net fund value 1 9930 10724.4 0 10724.4 2 10724.4 11582.352 0 11582.352 3 11582.352 12508.94016 0 12508.94016 4 12508.94016 13509.65537 0 13509.65537 5 13509.65537 14590.4278 0 14590.4278 6 14590.4278 15757.66203 0 15757.66203 7 15757.66203 17018.27499 0 17018.27499 8 17018.27499 18379.73699 0 18379.73699 9 18379.73699 19850.11595 0 19850.11595 10 19850.11595 21438.12522 0 21438.12522 11 21438.12522 23153.17524 0 23153.17524 12 23153.17524 25005.42926 0 25005.42926 13 25005.42926 27005.8636 0 27005.8636 14 27005.8636 29166.33269 0 29166.33269 15 29166.33269 31499.6393 0 31499.6393 16 31499.6393 34019.61045 0 34019.61045 17 34019.61045 36741.17928 0 36741.17928 18 36741.17928 39680.47363 0 39680.47363 19 39680.47363 42854.91152 0 42854.91152 20 42854.91152 46283.30444 0 46283.30444 Cash value after 20 year $46,283.30
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.