A JOB AT EAST COAST YACHTS

You recently graduated from college, and your job search led you to East Coast Yachts. Because you felt the company's business was seaworthy, you accepted a job offer. The first day on the job, while you are finishing your employment paperwork, Dan Ervin, who works in Finance, stops by to inform you about the company's 401(k) plan.

A 401(k) plan is a retirement plan offered by many companies. Such plans are tax- deferred savings vehicles, meaning that any deposits you make into the plan are deducted from your current pretax income, so no current taxes are paid on the money. For example, assume your salary will be $50,000 per year. If you contribute $3,000 to the 401(k) plan, you will pay taxes on only $47,000 in income. There are also no taxes paid on any capital gains or income while you are invested in the plan, but you do pay taxes when you with-draw money at retirement. As is fairly common, the company also has a 5 percent match. This means that the company will match your contribution up to 5 percent of your salary, but you must contribute the amount that you want matched, up to the maximum.

The 401(k) plan has several options for investments, most of which are mutual funds. A mutual fund is a portfolio of assets. When you purchase shares in a mutual fund, you are actually purchasing partial ownership of the fund's assets. The return of the fund is the weighted average of the return of the assets owned by the fund, minus any expenses. The largest expense is typically the management fee, paid to the fund manager. The management fee is compensation for the manager, who makes all of the investment decisions for the fund.

East Coast Yachts uses Bledsoe Financial Services as its 401(k) plan administrator. Here are the investment options offered for employees:

Company Stock

One option in the 401(k) plan is stock in East Coast Yachts. The company is currently privately held. However, when you interviewed with the owner, Larissa Warren, she informed you the company was expected to go public in the next three to four years. Until then, a company stock price is simply set each year by the board of directors.

Bledsoe S&P 500 Index Fund

This mutual fund tracks the S&P 500. Stocks in the fund are weighted exactly the same as the S&P 500. This means the fund return is approximately the return on the S&P 500, minus expenses. Because an index fund purchases assets based on the composition of the index it is following, the fund manager is not required to research stocks and make investment decisions. The result is that the fund expenses are usually low. The Bledsoe S&P 500 Index Fund charges expenses of .15 percent of assets per year.

Bledsoe Small-Cap Fund

This fund primarily invests in small-capitalization stocks. As such, the returns of the fund are more volatile. The fund can also invest 10 percent of its assets in companies based outside the United States. This fund charges 1.70 percent in expenses.

Bledsoe Large-Company Stock Fund

This fund invests primarily in large- capitalization stocks of companies based in the United States. The fund is managed by Evan Bledsoe and has outperformed the market in six of the last eight years. The fund charges 1.50 percent in expenses.

Bledsoe Bond Fund

This fund invests in long-term corporate bonds issued by U.S. domiciled companies. The fund is restricted to investments in bonds with an investment grade credit rating. This fund charges 1.40 percent in expenses.

Bledsoe Money Market Fund

This fund invests in short-term, high credit quality debt instruments, which include Treasury bills. As such, the return on the money market fund is only slightly higher than the return on Treasury bills. Because of the credit quality and short-term nature of the investments, there is only a very slight risk of negative return. The fund charges .60 percent in expenses.

	10-Year Annual Return	Standar Deviation
Bledsoe S&P 500 Index Fund	11.04%	18.45%
Bledsoe Small-Cap Fund	16.14	29.18
Bledsoe Large-Company Stock Fund	12.15	24.43
Bledsoe Bond Fund	6.93	9.96

Please Complete in excel

5. Calculate the Sharpe ratio for Bledsoes S&P 500 Index, Small-Cap, Large-Company Stock, and Bond funds (both net of expenses and ignoring expenses). Assume a risk-free rate of 0.50%.

a. Which fund has the highest Sharpe ratio (ignoring expenses)?

b. Which fund has the highest Sharpe ratio (net of expenses)?

i. What is the interpretation of this funds ratio?