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Unformatted text preview: Wenfeng Chen (Perm# 8390148) Shuang Zhang (Perm# 8438319) Tai Hung Ng (Perm# 8403404) Mei Chin Kwok(Perm#7466113) Econ 134A Homework #2 Part I 1. What advantages do the mutual funds offer compared to the company stock? Investing in mutual funds gives investors the opportunity to invest not just in couple of stocks but hundreds, thus making their portfolio more diverse. That is to say purchasing a piece of a mutual fund allows you to lower one’s rick via the power of diversification. The other advantage of mutual funds over stocks is that by investing in a mutual fund, one can receive the benefits of an experienced professional fund manager who actively manages the fund at a reasonable price. Also, we can exit a mutual fund without getting caught on the bid/ask spread. Mutual funds provide a cheap and easy method for reinvesting dividends. 2. Assume that you invest 5% of your salary and receive the full 5% match from East Coast Yachts. What EAR do you earn from the match? What conclusion do you draw about matching plans? If we exclude the possible market returns and inflation, the EAR equals 100% because I instantly receive the 5% back. However, the expected return of the 401(k) investment depends on the actual return of the plan. In that case, we can invest in many other type of 401(k). 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 S&P 500 Index Fund? Advantages: (1) Able to be responsive to the volatility : Once investing in the Bledsoe Large- Company Stock Fund, the fund manager of Bledsoe will make all appropriate investment decisions and be helping us choose the most profitable portfolio. On the other hand, he is not responsible for any investment decision making if we invest in S&P 500 Fund. Therefore, by choosing Bledsoe Large-Company Stock Fund, we expect that the fund manager will monitor the stock market on an on-going basis and do everything he can to make a profit from our money 1 invested. At the same time, we are protected from any sudden fluctuation of stocks that can lose all of our money. (2) Higher expected return : By investing in Bledsoe Large-Company Stock Fund, our money is distributed into various stocks with the highest profitability among the entire market. It will give us a superior rate of return....
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This homework help was uploaded on 04/11/2008 for the course ECON 134 taught by Professor Mehra during the Spring '08 term at UCSB.
- Spring '08