You recently graduated from college, and your job search led you to S&S Air. Because you felt the company's business was headed skyward, you accepted the job offer. As you are finishing your employment paperwork, Chris Guthrie, who works in the finance department, stops by to inform you about the company's new 401(k) plan.

1. What advantages/disadvantages do the mutual funds offer compared to company stock for your retirement investing?

2. Notice that, for every dollar you invest, S&S Air also invests a dollar. What return on your investment does this represent? What does your answer suggest about matching programs?

3. Assume you decide you should invest at least part of your money in large capitalization stocks of companies based in the United States. What are the advantages and disadvantages of choosing the Arias Large-Company Stock Fund compared to the Arias S&P 500 Index Fund?

4. The returns of the Arias Small-Cap Fund are the most volatile of all the mutual funds offered in the 401 (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. Will this affect your decision to invest in this fund?

5. A measure of risk-adjusted performance that is often used in practice is the Sharpe ratio. The Sharpe ratio is calculated as the risk premium of an asset divided by its standard deviation.

The standard deviations and returns for the funds over the past 10 years are listed here. Assuming a risk-free rate of 4 percent, calculate the Sharpe ratio for each of these. In broad terms, what do you suppose the Sharpe ratio is intended to measure?

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10-Year Annual Return Standard Deviation 9.1 5% Arias S&P 500 Index Fund Arias Small-Cap Fund Arias Large-Company Stock Fund Arias Bond Fund 1 9.35% 26.82 23.82 11.45 14.05 9.53 8.73