A good stock-based mutual fund should earn at least 6% per year over a long peri
ID: 2615360 • Letter: A
Question
A good stock-based mutual fund should earn at least 6% per year over a long period of time. Consider the case of Barney and Lynn, who were overheard gloating (for all to hear) about how well they had done with their mutual fund investment." We turned a $27,500 investment of money in 1982 into $137,500 in 2007." a. What return (interest rate) did they really earn on their investment? Should they have been bragging about how investment-savvy they were? b. Instead, if $1,100 had been invested each year for 25 years to accumulate $137,500, what return did Barney and Lynn earn? 9 2 3 0 0 0Explanation / Answer
a) The rate of return can be found using following formual
FV = PV(1+r)^n
137500 = 27500(1+r)^25
5=(1+r)^25
Assuming r = 6.666%
(1.06666)^25 = 5
Thus R = 6.6666%
They have earned return over what mutual fund provided, but just by 0.6666%
b) If there was an annuity, then r can be found using following formula
FV = A[(1+r)^n-1/r]
137500=1100[(1+r)^25-1/r]
=125 = [(1+r)^25-1/r]
Assuming r = 11.6%
[(1.116)^25-1/0.116] = 125
Thus r = 11.6%
In this case they have earn extra ordinary return compared to what mutual fund provided