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QUESTIONS 1 . What advantages do the mutual funds offer compared to the company stock? 2 . Assume that you invest 5 percent of your
QUESTIONS What advantages do the mutual funds offer compared to the company stock? Assume that you invest percent of your salary and receive the full percent match from S&S Air. What EAR do you earn from the match? What conclusions do you draw about matching plans? Assume you decide you should invest at least part of your money in largecapitalization stocks of companies based in the United States. What are the advantages and disadvantages of choosing the Bledsoe LargeCompany Stock Fund compared to the Bledsoe S&P Index Fund? The returns on the Bledsoe SmallCap Fund are the most volatile of all the mutual funds offered in the k plan. Why would you ever want to invest in this fund? When you examine the expenses of the mutual funds, you will notice that this fund also has the highest expenses. Does this affect your decision to invest in this fund? A measure of riskadjusted performance that is often used is the Sharpe ratio. The Sharpe ratio is calculated as the risk premium of an asset divided by its standard deviation. The standard deviation and return of the funds over the past years are listed in the following table. Calculate the Sharpe ratio for each of these funds. Assume that the expected return and standard deviation of the company stock will be percent and percent, respectively. Calculate the Sharpe ratio for the company stock. How appropriate is the Sharpe ratio for these assets? When would you use the Sharpe ratio? Year Standard Annual Return Deviation Bledsoe S&P Index Fund Bledsoe SmallCap Fund Bledsoe LargeCompany Stock Fund Bledsoe Bond Fund What portfolio allocation would you choose? Why? Explain your thinking carefully. A JOB AT S&S AIR You recently graduated from college, and your job search led you to S&S Air. Because you felt the company's business was taking off, you accepted a job offer. The first day on the job, while you are finishing your employment paperwork, Chris Guthrie, who works in Finance, stops by to inform you about the company's k plan. A k plan is a retirement plan offered by many companies. Such plans are taxdeferred 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 $ per year. If you contribute $ to the k plan, you will pay taxes on only $ 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 withdraw money at retirement. As is fairly common, the company also has a percent match. This means that the company will match your contribution up to percent of your salary, but you must contribute to get the match. The 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. S&S Air uses Bledsoe Financial Services as its k plan administrator. Here are the investment options offered for employees: Company Stock One option in the k plan is stock in S&S Air. The company is currently privately held. However, when you interviewed with the owners, Mark Sexton and Todd Story, they informed you the company stock is expected to go public in the next three to four years. Until then, a company stock price is set each year by the board of directors. Bledsoe S&P Index Fund This mutual fund tracks the S&P Stocks in the fund are weighted exactly the same as the S&P This means the fund return is approximately the return on the S&P 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 Index Fund charges expenses of percent of assets per year. Bledsoe SmallCap Fund This fund primarily invests in smallcapitalization stocks. As such, the returns of the fund are more volatile. The fund can also invest percent of its assets in companies based outside the United States. This fund charges percent in expenses. Bledsoe LargeCompany Stock Fund This fund invests primarily in largecapitalization 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 percent in expenses. Bledsoe Bond Fund This fund invests in longterm corporate bonds issued by USdomiciled companies. The fund is restricted to investments in bonds with an investmentgrade credit rating. This fund charges percent in expenses. Bledsoe Money Market Fund This fund invests in shortterm, high creditquality 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 shortterm nature of the investments, there is only a very slight risk of a negative return. The fund charges percent in expenses
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