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 East Coast Yachts. 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 SP 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 deviations and returns of the funds over the past 10 years are listed here. Calculate the Sharpe ratio for each of these funds. Assume that the expected return and standard deviation of the company stock will be 16 percent and 58 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? Assume a 3.2 percent risk-free rate.

Advantages of Mutual Funds Compared to Company Stock:

• Diversification: Mutual funds offer diversification by investing in a variety of assets, which reduces the risk compared to investing in a single company's stock.
• Professional Management: Mutual funds are managed by professional fund managers who make investment decisions, which can be beneficial for investors who lack the time or expertise to manage their own investments.
• Liquidity: Mutual funds are generally more liquid than privately held company stock, meaning they can be bought and sold more easily.
• Lower Risk: Investing in a mutual fund typically involves less risk than investing in a single company's stock, especially if the company is privately held and not yet public.

Effective Annual Rate (EAR) from the Match:

• If you invest 5% of your $50,000 salary, that's $2,500. East Coast Yachts matches this with another $2,500.
• The match effectively doubles your investment, providing a 100% return on the $2,500 you contributed.
• The EAR from the match is 100% because you receive an additional $2,500 for your $2,500 contribution.
• Conclusion: Matching plans are highly beneficial as they provide an immediate and substantial return on your investment, effectively doubling the amount you contribute up to the match limit.

Advantages and Disadvantages of Bledsoe Large-Company Stock Fund vs. Bledsoe S&P 500 Index Fund:

• Advantages of Large-Company Stock Fund:

  • Potential for Outperformance: The fund has outperformed the market in six of the last eight years, suggesting the possibility of higher returns.
  • Active Management: The fund is actively managed, which can be advantageous if the manager is skilled at selecting stocks that outperform the market.

• Disadvantages of Large-Company Stock Fund:

  • Higher Expenses: The fund charges 1.50% in expenses, which is higher than the index fund's expenses.
  • Manager Risk: The performance depends on the manager's skill, and past performance does not guarantee future results.

• Advantages of S&P 500 Index Fund:

  • Lower Expenses: The index fund has lower expenses (0.15%), which can lead to higher net returns over time.
  • Diversification: The fund provides broad market exposure, reducing company-specific risk.

• Disadvantages of S&P 500 Index Fund:

  • Limited Potential for Outperformance: The fund is designed to match the market's performance, so it won't outperform the index.
  • No Active Management: The fund does not benefit from active stock selection, which could be a disadvantage if the market is inefficient.