Question: A mutual fund has been advertising that, had you deposited $250 per month in the fund for the last 10 years, you would now have accumulated $85,000. Assuming that these deposits were made at the beginning of each month for a period of 120 months, calculate the effective annual return fund investors got.
The effective annual return can then be calculated in one of two ways:
• (1 + monthly return ) 12 - 1: This is the compound annual return, which is preferable, since it makes allowance for the reinvestment of each month ' s earnings.
• 12* monthly return : This method is often used by banks.