HW II - Economics 134 Financial Management Homework #2...

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Economics 134 Financial Management  Homework #2 May 7, 2009 Group Members: Danny Yeung 7480197 Frederick Kwan 7655905 Guanglei Zhang 7058530 Keli Wong 7263395 Xi Song  8391443 Qiuping Zha  7945306 1
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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 risk via the power of diversification. Also, by investing in a mutual fund, one receives the benefits of an experienced professional fund manager who actively manages the fund (depending on the specific fund, of course) at a reasonable price. 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? EAR = 100% if we exclude the possible market returns and inflation. However the expected return of the 401(k) investment depends on the actual return of the plan, in this 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 US. What are the advantages and disadvantages of choosing the Bledosoe Large – Company Stock The Bledsoe Large-Company Stock Fund (LCSF) is restricted to large- capitalization companies which would imply that the fund is less diverse than the Bledsoe S&P 500 (BSP). Thus, this fund loses part of the benefit derived from diversification. However, since the LCSF is actively managed, it charges a higher expense load than the BSP. Given the nature of the asset market as a random walk, the LCSF’s outperformance of the market is not a strong factor to consider when choosing between the funds, since it is still quite possible for the LCSF to return less than the BSP. 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? The choice to invest in this “most volatile” fund has to do with personal
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HW II - Economics 134 Financial Management Homework #2...

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