Person X was working with Company ECY and has to sign up with the company’s 401(k) plan. Person X was confused to make the investments. There are more number of stocks available in Company ECY. Person X decides to make an investment in a diversified portfolio which classified into 70% in equity, 25% in bonds, and 5 % in the money market funds. He was debating whether to go with Company S & P 500Index fund or Company L the large company stock fund. He takes help from Person D, who works in the department of finance. Person D gives some information regarding the equity mutual funds and Company V500 index funds. V500 is basically identical to the B S&P 500 Index fund offered in 401(k) plan. Characters in the case: Person X: The employee of ECY. Person D: The person who works in the company’s finance. To discuss: The implications for the mutual fund investors.

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Answer 1

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Definition Definition Degree to which financial markets incorporate all available information into the prices of assets. In a more efficient market, the prices reflect the available information more than that in a weak efficient market. It is difficult for investors to outperform the market in a strong efficient market. This is because all the available information is already discounted in the asset's price. However, in a weak-form efficiency, the market does not reflect all information in the asset's price. As a result, it becomes easier to generate better returns in a weak form or an inefficient market.

Chapter 14, Problem 1MC

Summary Introduction

Case summary:

Person X was working with Company ECY and has to sign up with the company’s 401(k) plan. Person X was confused to make the investments. There are more number of stocks available in Company ECY. Person X decides to make an investment in a diversified portfolio which classified into 70% in equity, 25% in bonds, and 5 % in the money market funds. He was debating whether to go with Company S & P 500Index fund or Company L the large company stock fund.

He takes help from Person D, who works in the department of finance. Person D gives some information regarding the equity mutual funds and Company V500 index funds. V500 is basically identical to the B S&P 500 Index fund offered in 401(k) plan.

Characters in the case:

Person X: The employee of ECY.

Person D: The person who works in the company’s finance.

To discuss: The implications for the mutual fund investors.

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Scenario one: Under what circumstances would it be appropriate for a firm to use different cost of capital for its different operating divisions? If the overall firm WACC was used as the hurdle rate for all divisions, would the riskier division or the more conservative divisions tend to get most of the investment projects? Why? If you were to try to estimate the appropriate cost of capital for different divisions, what problems might you encounter? What are two techniques you could use to develop a rough estimate for each division’s cost of capital?

Answer 2

Question

Definition Definition Degree to which financial markets incorporate all available information into the prices of assets. In a more efficient market, the prices reflect the available information more than that in a weak efficient market. It is difficult for investors to outperform the market in a strong efficient market. This is because all the available information is already discounted in the asset's price. However, in a weak-form efficiency, the market does not reflect all information in the asset's price. As a result, it becomes easier to generate better returns in a weak form or an inefficient market.

Chapter 14, Problem 1MC

Summary Introduction

Case summary:

Person X was working with Company ECY and has to sign up with the company’s 401(k) plan. Person X was confused to make the investments. There are more number of stocks available in Company ECY. Person X decides to make an investment in a diversified portfolio which classified into 70% in equity, 25% in bonds, and 5 % in the money market funds. He was debating whether to go with Company S & P 500Index fund or Company L the large company stock fund.

He takes help from Person D, who works in the department of finance. Person D gives some information regarding the equity mutual funds and Company V500 index funds. V500 is basically identical to the B S&P 500 Index fund offered in 401(k) plan.

Characters in the case:

Person X: The employee of ECY.

Person D: The person who works in the company’s finance.

To discuss: The implications for the mutual fund investors.

Expert Solution & Answer

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Check out a sample textbook solution

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Answer 3

Question

Definition Definition Degree to which financial markets incorporate all available information into the prices of assets. In a more efficient market, the prices reflect the available information more than that in a weak efficient market. It is difficult for investors to outperform the market in a strong efficient market. This is because all the available information is already discounted in the asset's price. However, in a weak-form efficiency, the market does not reflect all information in the asset's price. As a result, it becomes easier to generate better returns in a weak form or an inefficient market.

Chapter 14, Problem 1MC

Summary Introduction

Case summary:

Person X was working with Company ECY and has to sign up with the company’s 401(k) plan. Person X was confused to make the investments. There are more number of stocks available in Company ECY. Person X decides to make an investment in a diversified portfolio which classified into 70% in equity, 25% in bonds, and 5 % in the money market funds. He was debating whether to go with Company S & P 500Index fund or Company L the large company stock fund.

He takes help from Person D, who works in the department of finance. Person D gives some information regarding the equity mutual funds and Company V500 index funds. V500 is basically identical to the B S&P 500 Index fund offered in 401(k) plan.

Characters in the case:

Person X: The employee of ECY.

Person D: The person who works in the company’s finance.

To discuss: The implications for the mutual fund investors.

Expert Solution & Answer

Want to see the full answer?

Check out a sample textbook solution

See solution

Answer 4

Question

Definition Definition Degree to which financial markets incorporate all available information into the prices of assets. In a more efficient market, the prices reflect the available information more than that in a weak efficient market. It is difficult for investors to outperform the market in a strong efficient market. This is because all the available information is already discounted in the asset's price. However, in a weak-form efficiency, the market does not reflect all information in the asset's price. As a result, it becomes easier to generate better returns in a weak form or an inefficient market.

Chapter 14, Problem 1MC

Summary Introduction