Question

Answer 1

Q1)

As compared to common stocks, mutual funds offer a variety of benefits. To name a few:

Diversification benefits

A mutual funds provides diversification benefits to its investors by investing funds in uncorrelated securities to minimise risk and maximise returns. It may not be possible for a lone investor to create a diversified portfolio and investing in mutual funds helps to overcome this barrier.

Unit Value

As compared to the cost of one company stock, the value of a mutual fund unit would be more valuable as it gives exposure to a variety of stocks. This may not be possible when purchasing a stock, as the price is fixed and gives exposure to only one company.

Surety

Considering the above case, there isn't any surety in the company stock's value (i.e. it may crash any time). However, this would not be the case when investing in the mutual fund as funds are divided upon multiple stocks/asset classes.

Q2)

Advantages:

• On choosing the Bledsoe Large Company stock fund, the investor is expected to receive steady growth in wealth creation, as it is observed that Large Company stocks pay dividend regularly.
• Also, the Bledsoe S&P 500 Index Fund is a relatively passive fund. If the index/market falls, the fund returns are also expected to fall. On the other hand, the Bledsoe Large Company stock fund is an actively managed fund.
• The case also states that the Bledsoe Large Company stock fund has outperformed the market (S&P 500 Index) in six of the past 8 years. Thus, the track record also goes in favour of the Large Company stock fund.

Disadvantages:

• The fund fees charged by the Bledsoe Large Company stock fund is 1.5% of the assets, where as the Bledsoe S&P 500 Index Fund charges a fee of 0.15% of the assets. Such a high percent of fees could eat up the returns given to the investors, which are net of the fees paid.
• On observing the 10-year annual return and standard deviation, we can see that the Bledsoe Large Company stock fund has had a higher standard deviation of returns at 23.82%, as compared to Bledsoe S&P 500 Index Fund's 20.43%.
• In fact, the Average 10-year annual return of the Large Company stock fund has been low at 8.58%, as compared to Bledsoe S&P 500 Index Fund's 9.18%.
• The main reason for this could be the fees, that would eat a major part of the return.

Q3)

• As the history in the stock market goes, Small cap funds have had significant upside growth potential, which aren't matched even by matured large cap companies in the market.
• Even though there exists a high risk in investing in such stocks through the Bledsoe Small Cap fund, the rewards in terms of return could also be well worth it.
• The expenses in this fund are bound to be higher as the management would wish to invest in small cap companies that have high growth opportunities, which are very difficult to find.
• A high fund charge of 1.7% could be a concern in this fund, because as we saw above in Q2, high fees are bound to eat up the fund returns.
• However, a risk taking investor may wish to be a part of this fund to gain exposure to a high upside potential through these funds, which may be able to compensate the high fees and there after have the possibility to generate Net returns higher than the other funds.

Q4)

The Sharpe ratio = (Rp - Rf) / Standard deviation of portfolio

Rp = Return on Portfolio

Rf = Risk free rate (in this case 3.2%)

For example,

Sharpe ratio for Bledsoe S&P 500 Index Fund = (9.18%-3.2%)/20.43%

Sharpe ratio for Bledsoe S&P 500 Index Fund = 0.29

Fund Name	Sharpe Ratio
Bledsoe S&P 500 Index Fund	0.29
Bledsoe Small-Cap Fund	0.43
Bledsoe Large Company Stock Fund	0.23
Bledsoe Bond Fund	0.33

A higher Sharpe ratio is considered to be better, as it provides a better risk-adjusted return. Sharpe ratio measures the per unit of return (premium return, over and above risk free rate) for each unit of risk undertaken (standard deviation).

In the above case, the Bledsoe Small-Cap fund has generated the highest Sharpe Ratio, 0.43.

Q5)

• Through our analysis, you can conclude that the most logical conclusion would be to invest in the Bledsoe Small-Cap fund, as it has generated the highest Sharpe Ratio (0.43) and proved its superior performance over the other funds.