FINRA Series 6 Investment Company and Variable Contracts Products Representative ExaminationRegulatory Fundamentals and General Product KnowledgeMedium
A client is considering investing in a mutual fund and observes that the fund's expense ratio is 1.50%. If the fund has $500 million in assets under management (AUM), what is the approximate annual operating expense in dollar terms?
- A$75 million
- B$7.5 million
- C$750 million
- D$750,000
Show answer & explanationAnswer & explanation
Correct answer: B. $7.5 million
The expense ratio represents the percentage of a fund's assets that are used to cover operating expenses. To find the annual operating expense, multiply the expense ratio by the total assets under management: 1.50% of $500,000,000 = 0.015 * $500,000,000 = $7,500,000 or $7.5 million.
Why the other options are wrong
- A. This calculation is incorrect (15% or 0.15 * $500M).
- C. This calculation is incorrect (150% or 1.5 * $500M).
- D. This calculation is incorrect (0.15% or 0.0015 * $500M).
Mutual Fund Expense Ratio Calculation
The expense ratio is the annual percentage of fund assets deducted to cover operating expenses. To calculate dollar expenses, multiply the expense ratio by the total assets under management.
- Expense ratio is a percentage
- Applied to assets under management (AUM)
- Covers operating costs (management fees, admin, marketing)
- Impacts investor returns
Memory trick: Expense Ratio: 'Percent of assets' means 'multiply by AUM' to 'get the dollar cost'.