Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Page
QUESTIONS
1. What advantages do the mutual funds offer compared to the company stock?
2. Assume that you invest 5 percent of your salary and receive the full 5 percent match from S&S Air. What EAR do you earn from
the match? What conclusions do you draw about matching plans?
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 Bledsoe Large-Company Stock Fund compared to the Bledsoe
S&P 500 Index Fund?
4. The returns on the Bledsoe 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. Does this affect your decision to invest in this fund?
5. A measure of risk-adjusted 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 10 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 17 percent and 70 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?
Transcribed Image Text:10-Year
Standard
Annual Return
Deviation
Bledsoe S&P 500 Index Fund
6.88%
10.75%
Bledsoe Small-Cap Fund
9.29
12.81
Bledsoe Large-Company
3.56
10.99
Stock Fund
5.27
7.12
Bledsoe Bond Fund
6. What portfolio allocation would you choose? Why? Explain your thinking carefully.
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