Comparing No-Load Fund A and Load Fund B: Which Offers the Higher Net Return?

D

Fund A's rate of return over 1 year equals 1.13 *0.98 - 1 = 10.74%. Fund B's return equals 0.95 * 1.17 - 1 = 11.15%. Hence, select fund B for a 1-year horizon.

To determine which fund to invest in and calculate the expected net rate of return per year, we need to consider the impact of both the expense ratios and the loads associated with each fund.

1. Fund A:

   • No-load fund: This means there is no upfront sales charge when you invest in the fund.
   • It charges a 2% redemption fee: This fee is applicable when you sell or redeem your investment within a certain time frame.
   • Expected return: 13%

2. Fund B:

   • 5% load fund: This means there is a 5% upfront sales charge when you invest in the fund.
   • No redemption fee: There is no fee charged when you sell or redeem your investment.
   • Expected return: 17%

Now, let's calculate the net rate of return for each fund:

For Fund A: If you invest $100 in Fund A and hold it for the entire year, the initial investment will remain intact. However, if you redeem the investment within the specified time frame, a 2% fee will be charged.

At the end of the year, the investment is expected to grow by 13%. Therefore, the ending value would be: Ending value = $100 + ($100 * 0.13) = $113

However, if you redeem the investment, a 2% fee will be charged, which would be: Redemption fee = $113 * 0.02 = $2.26

Therefore, the net amount received after deducting the redemption fee would be: Net amount received = $113 - $2.26 = $110.74

To calculate the net rate of return, we need to find the rate at which $100 would grow to $110.74: Net rate of return = (($110.74 - $100) / $100) * 100 = 10.74%

For Fund B: If you invest $100 in Fund B, there is a 5% upfront sales charge. So, the amount invested would be: Amount invested = $100 - ($100 * 0.05) = $95

At the end of the year, the investment is expected to grow by 17%. Therefore, the ending value would be: Ending value = $95 + ($95 * 0.17) = $111.15

Since there is no redemption fee, the net amount received is equal to the ending value. To calculate the net rate of return, we need to find the rate at which $100 would grow to $111.15: Net rate of return = (($111.15 - $100) / $100) * 100 = 11.15%

Based on the calculations, the correct answer is D. B; 11.15%. Investing in Fund B would result in a higher net rate of return compared to Fund A.