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CHAPTER 10 CASE 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
3. The advantage of the actively managed fund is the possibility of outperforming the market, which
the fund has done on average over the past ten years. The major disadvantage is the likelihood of
underperforming the market. In general, most mutual funds do not outperform the market for an
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
5. The Sharpe ratio for each of the mutual funds and the company stocks are:
Bledsoe S&P 500 Index Fund = (9.18% – 3.2) / 20.43% = .2927
Bledsoe Small-Cap Fund = (14.12% – 3.2) / 25.13% = .4345
6. 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
diversification indicates that an individual should hold a diversified portfolio. Investing heavily in
company stock does not create a diversified portfolio. This is especially true since income comes
CHAPTER 10 CASE C-2
