What is the mutual fund's expense ratio?

The correct answer regarding a mutual fund's expense ratio is the ratio of expenses to average net assets. This metric provides insight into the costs associated with managing the fund, including administrative fees, management fees, and other operational expenses, expressed as a percentage of the fund's average net assets over a specified period.

Understanding the expense ratio is crucial for investors because it impacts the fund's overall return. A lower expense ratio typically means that more of the fund's profits are retained by the investor rather than used to cover costs. Conversely, a higher expense ratio can erode returns over time, making it essential for investors to consider this ratio when comparing mutual funds.

Other options, while they refer to important financial concepts, do not accurately represent what the expense ratio is. For instance, the ratio of profits to total assets describes profitability but does not account for ongoing expenses. The ratio of liabilities to equity focuses on the leverage or debt structure of a fund but doesn't reflect costs associated with fund management. The concept of portfolio turnover relates to trading activity within the fund and how often securities are bought and sold but doesn't measure expenses relative to net assets. Understanding these differences helps clarify why the expense ratio is specifically defined as the ratio of expenses to average net assets.