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CHAPTER 10 C-1
CHAPTER 10
A JOB AT EAST COAST YACHTS
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. The major
disadvantage is the likelihood of underperforming the market. In general, most mutual funds do not
outperform the market for an extended period of time, and finding the funds that will outperform the
even more difficult is the management fee charged by the fund.
4. The returns are the most volatile for the small cap fund because the stocks in this fund are the riskiest.
This does not imply the fund is bad, just that the risk is higher, and therefore, the expected return is
on the additional risk in expectation of a higher return.
The higher expenses of the fund are expected. In general, small cap funds have higher expenses, in
large part due to the greater cost of running the fund, including researching smaller stocks.
Using the average return for each fund over the past 10 years and the average risk-free rate, we find:
The Sharpe ratio is most applicable for a diversified portfolio, and is least applicable for the
company stock.
5. This is a very open-ended question. The asset allocation depends on the risk tolerance of the
individual. However, most students will be young, so in this case, the portfolio allocation should be
more heavily weighted toward stocks.
In any case, there should be little, if any, money allocated to the company stock. The principle of
