Chapter 10
	A Job at S&S Air
	Input area:
	Risk-free rate
		10-year return	Standard deviation
	S&P 500 Index fund
	Small-cap stock fund
	Large company stock fund
	Bond fund
	Output area:
	Sharpe ratios:
	S&P 500 Index fund	#DIV/0!
	Small-cap stock fund	#DIV/0!
	Large company stock fund	#DIV/0!
	Bond fund	#DIV/0!

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CHAPTER 10 Some Lessons from Capital Market History 347 CHAPTER CASE A Job at S&S Air Vou recently grad search led you to S&S Air. Becaus ny's business was headed skywar ob offer. As you are finishing you atly graduated from college, and your iob SRS Air. Because you felt the com- headed skyward, you accepted the finishing your employment paper- who works in the finance depart- work, Chris G by to inform you about the company's new ment, stops by to infor 401K) plan A 401(k) is a type o companies. A Story, they informed you that the company stock was expected to be publicly sold in three to five years. If you needed to sell the stock before it be came publicly traded, the company would buy it back at the then-current appraised value. Arias S&P 500 Index Fund. This mutual fund tracks the S&P 500. Stocks in the fund are weighted ex- actly the same as they are in the S&P 500. This means that the fund's return is approximately the return of the S&P 500, minus expenses. With an index fund, the manager is not required to research stocks and make investment decisions, so fund ex- penses are usually low. The Arias S&P 500 Index Fund charges expenses of 20 percent of assets your current income w is a type of retirement plan offered by many k) is tax deferred, which means that nake into the plan are deducted from any deposits you make into the plan are de rrent income, so no current taxes are paid on the nov. For example, assume your salary will be $30.000 of vear. If you contribute $1,500 to the 401(ki plan will pay taxes only on $28,500 in income. No taxes will ve on any capital gains or plan income while you are invested in the plan, but you will pay taxes when you withdraw the money at retirement. You can contribute up to 15 percent of your salary to the plan. As is com- mon, S&S Air also has a 5 percent match program. This means that the company will match your contribution dollar-for-dollar up to 5 percent of your salary, but you must contribute to get the match. The 401(k) plan has several options for investments, most of which are mutual funds. As you know, 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, similar to purchasing Shares of stock in a company. The return of the fund is the weighted average of the return of the assets owned w the fund, minus any expenses. The largest expense Pically the management fee paid to the fund man- who makes all of the investment decisions for the S&S Air uses Arias Financial Services as its 401(k) per year. Arias 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 of assets in expenses per year. 4. Arias Large-Company Stock Fund. This fund invests primarily in large capitalization stocks of companies based in the United States. The fund is managed by Melissa Arias and has outperformed the market in six of the last eight years. The fund charges 1.50 percent in expenses. 5. Arias Bond Fund. This fund invests in long-term corporate bonds issued by U.S. domiciled compa- nies. The fund is restricted to investments in bonds with an investment grade credit rating. This fund charges 1.40 percent in expenses. Arias Money Market Fund. This fund invests in short-term, high credit quality debt instruments, which include Treasury bills. As such, the return on money market funds is only slightly higher than the return on Treasury bills. Because of the credit qual- ity and short-term nature of the investments, there is only a very slight risk of negative return. The fund charges.60 percent in expenses. 6. plan administrator vestment options o Guthrie then explains that the retirement in- options offered for employees are as follows: Company stock. On company is currently would pay for the praisal, less a 20 P terviewed with the V stock. One option is stock in S&S Air. The any is currently privately held. The price you "pay for the stock is based on an annual ap- less a 20 percent discount. When you in- with the owners, Mark Sexton and Todd CHAPTER 10 Some Lessons from Capital Market History 347 CHAPTER CASE A Job at S&S Air Vou recently grad search led you to S&S Air. Becaus ny's business was headed skywar ob offer. As you are finishing you atly graduated from college, and your iob SRS Air. Because you felt the com- headed skyward, you accepted the finishing your employment paper- who works in the finance depart- work, Chris G by to inform you about the company's new ment, stops by to infor 401K) plan A 401(k) is a type o companies. A Story, they informed you that the company stock was expected to be publicly sold in three to five years. If you needed to sell the stock before it be came publicly traded, the company would buy it back at the then-current appraised value. Arias S&P 500 Index Fund. This mutual fund tracks the S&P 500. Stocks in the fund are weighted ex- actly the same as they are in the S&P 500. This means that the fund's return is approximately the return of the S&P 500, minus expenses. With an index fund, the manager is not required to research stocks and make investment decisions, so fund ex- penses are usually low. The Arias S&P 500 Index Fund charges expenses of 20 percent of assets your current income w is a type of retirement plan offered by many k) is tax deferred, which means that nake into the plan are deducted from any deposits you make into the plan are de rrent income, so no current taxes are paid on the nov. For example, assume your salary will be $30.000 of vear. If you contribute $1,500 to the 401(ki plan will pay taxes only on $28,500 in income. No taxes will ve on any capital gains or plan income while you are invested in the plan, but you will pay taxes when you withdraw the money at retirement. You can contribute up to 15 percent of your salary to the plan. As is com- mon, S&S Air also has a 5 percent match program. This means that the company will match your contribution dollar-for-dollar up to 5 percent of your salary, but you must contribute to get the match. The 401(k) plan has several options for investments, most of which are mutual funds. As you know, 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, similar to purchasing Shares of stock in a company. The return of the fund is the weighted average of the return of the assets owned w the fund, minus any expenses. The largest expense Pically the management fee paid to the fund man- who makes all of the investment decisions for the S&S Air uses Arias Financial Services as its 401(k) per year. Arias 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 of assets in expenses per year. 4. Arias Large-Company Stock Fund. This fund invests primarily in large capitalization stocks of companies based in the United States. The fund is managed by Melissa Arias and has outperformed the market in six of the last eight years. The fund charges 1.50 percent in expenses. 5. Arias Bond Fund. This fund invests in long-term corporate bonds issued by U.S. domiciled compa- nies. The fund is restricted to investments in bonds with an investment grade credit rating. This fund charges 1.40 percent in expenses. Arias Money Market Fund. This fund invests in short-term, high credit quality debt instruments, which include Treasury bills. As such, the return on money market funds is only slightly higher than the return on Treasury bills. Because of the credit qual- ity and short-term nature of the investments, there is only a very slight risk of negative return. The fund charges.60 percent in expenses. 6. plan administrator vestment options o Guthrie then explains that the retirement in- options offered for employees are as follows: Company stock. On company is currently would pay for the praisal, less a 20 P terviewed with the V stock. One option is stock in S&S Air. The any is currently privately held. The price you "pay for the stock is based on an annual ap- less a 20 percent discount. When you in- with the owners, Mark Sexton and Todd