Chapter 12 Mini-Case Solution University of California, Los Angeles MGMT 130A
CHAPTER 12
A JOB AT S&S AIR
1. The biggest advantage the mutual funds have is instant diversification. The mutual funds have a
number of assets in the portfolio.
2. Both the APR and EAR are infinite. The match is instantaneous, so the number of periods in a year is
infinite.
3. The advantage of the actively m
...[Show More]
Chapter 12 Mini-Case Solution University of California, Los Angeles MGMT 130A
CHAPTER 12
A JOB AT S&S AIR
1. The biggest advantage the mutual funds have is instant diversification. The mutual funds have a
number of assets in the portfolio.
2. Both the APR and EAR are infinite. The match is instantaneous, so the number of periods in a year is
infinite.
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
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 market in the future
beforehand is a daunting task. One factor that makes outperforming the market 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 higher. You would want to invest in this fund if your risk tolerance is such that you are
willing to take 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.
5. Since we are given the average return for each fund over the past 10 years, we should use the
average risk-free rate over the same period. So, using the information from Table 12.1, the 10-year
average risk-free rate is:
Risk-free rate = (.0114 + .0279 + .0497 + .0452 + .0124 + .0015 + .0014 + .0006 + .0008+.0005)/10
Risk-free rate = .0151, or 1.51%
The Sharpe ratio for each of the mutual funds and the company stocks is:
Bledsoe S&P 500 Index Fund = (11.48% – 1.51) / 15.82% = .6300
Bledsoe Small-Cap Fund = (16.68% – 1.51) / 19.64% = .7722
[Show Less]