CHAPTER 12
A JOB AT S&S AIR
1. The biggest advantage the mutual funds have is instant diversification. The mutual funds have a
2. Both the APR and EAR are infinite. The match is instantaneous, so the number of periods in a year is
3. The advantage of the actively managed fund is the possibility of outperforming the market, which
the fund has done six of the last eight years. The major disadvantage is the likelihood of
4. The returns are the most volatile for the small cap fund because the stocks in this fund are the
The higher expenses of the fund are expected. In general, small cap funds have higher expenses, in
5. Since we are given the average return for each fund over the past 10 years, we should use the
The Sharpe ratio for each of the mutual funds and the company stocks is:
The Sharpe ratio is most applicable for a diversified portfolio, and is least applicable for the
company stock.
CHAPTER 12 C-2
6. This is a very open-ended question. The asset allocation depends on the risk tolerance of the
In any case, there should be little, if any, money allocated to the company stock. The principle of
diversification indicates that an individual should hold a diversified portfolio. Investing heavily in
Age is a determinant in the decision. Older individuals should be less heavily weighted toward
