Managerial Finance

MANAGERIAL FINANCE 1

ManagerialFinance

InstitutionAffiliation

Advantages ofMutual Funds over Company Stock

Mutual funds are advantageous over common stock for various reasons.It is for this reasons that they are popular among investors. Theadvantages can be divided into three main groups namelydiversification of the portfolio, lower costs and convenience(Haslem, 2003). According to most investors, mutual funds are populardue to the ability to diversify the stock portfolio according to thepreference of the investors. This involves the identification andpurchase of different stock of companies that operate in varyingsectors of the economy. In such cases, risks in the stocks arediversified away. Any additional risks that cannot be diversifiedaway are classified as systematic risks. They are also known asmarket-wide risks. The diversification of stock portfolios spreadsthe risks thereby limiting the level of losses that an investor mayface (Haslem, 2010).

Investors are likely to choose mutual funds due to their convenience(Haslem, 2010). The process involves the identification ofportfolio’s asset location and the identification of individualstock that meets the needs of an organization are regarded asessential components the mutual funds. The investor gains theadvantage of being able to monitor the progress of the stockportfolio. It is, therefore, important to ensure that the investmentis not lost in the first place (Haslem, 2003). The mutual fundsprovide the investors with the opportunity to avoid the complexscenarios that come with the decision-making process. The mutualfunds are tailored in a way that they offer a variety of portfoliosfor the investors to choose from (Haslem, 2010).

Under most circumstances, it is evident that the trading costsrelating to the purchase and sale of company stocks are relativelyhigher for the investors (Haslem, 2010). This calls for alternativeactions to deal with the price issues. However, the mutual fundscreate a scenario in which the risks of business operations arespread across all investors in a particular product. Ultimately, thecosts of services are lowered for each investor.

Advantages andDisadvantages of Bledsoe Large-Company Stock Fund over Bledsoe S&ampP500 Index Fund

Various advantages can be attributed to the actively managed funds. These benefits enable the fund to outperform the market across allfronts. With regards to the scenario under consideration, it isevident that the managed funds have given better results than themarket for the last ten years. However, the significant disadvantagethat can be attributed to this scenario is underperforming themarket. This is experienced in instances whereby the market hasperformed better than the managed funds. Several individual managedfunds do not have better outcomes in comparison to the market for asubstantial period. Investors are likely to face a series of problemsin their quest to find stocks that will outperform the market.Finally, beating the market may become a daunting task because of thechallenges associated with the management of fees that are usuallylevied against the fund (Northcott, 2009).

Volatility ofBledsoe Small-Cap

The returns from Bledsoe Small-Cap are volatile due to the high risksthat are related to such investment portfolios. Despite thevolatility of the financial instrument, the returns are usually high.For an investor, the possibility of earning additional returns is anattractive venture, and they are willing to face enormous risks(Northcott, 2009). In case the investment overcomes the hazards, thenthe investment is likely to bring huge returns to the investors. Thehigh expense rate is associated with the high risk related to suchinvestment decisions. It does not have an effect on the decision toinvest in any stock portfolio.

The role ofmutual funds as a financial instrument has increased over the years.The additional focus is attributed to the advantages that investorsare able to derive from the stock portfolio. The diversification andavailability of a variety of products also make the mutual funds morepopular than the common company stocks (Haslem, 2003).

Sharpe Ratio

Sharpe ratiorefers to the risk-adjusted return on investments. It measures theaverage return earned over risk-free rate per unit of the total risk.

Sharpe ratio =(Mean&nbspportfolio return&nbsp− Risk-free rate)/Standarddeviation of portfolio return

References

Topof Form

Bottomof Form

Topof Form

Bottomof Form

Topof Form

Haslem, J. A.(2003).&nbspMutual Funds: Risk and Performance Analysis forDecision Making. Oxford: Blackwell Pub.

Haslem, J. A.(2010).&nbspMutual funds: Portfolio structures, analysis,management, and stewardship. Hoboken, N.J: Wiley.

Northcott, A.(2009).&nbspThe mutual funds book: How to invest in mutual funds&amp earn high rates of returns safely. Ocala, Fla: AtlanticPub. Group.

Bottomof Form

Managerial Finance

MANAGERIAL FINANCE 1

ManagerialFinance

1.Mutual funds have numerous advantages when compared to a company’sstocks. First of all, the mutual fund offers instant diversification(Jayadev, 1996). The fact that there are many stocks means that aninvestor can divide his risk. Investing in a company stock means thatone has only one stock to invest in. Secondly, mutual funds are aneasy investment. To invest in mutual funds an investor is onlyrequired to give the financial advisor instructions on the stocks tochoose. This differs with a company stock where an investor cannotinvest on until it becomes publicly owned. The third advantage ofmutual funds is liquidity. In the case of any occurrence an investorcan easily liquate the mutual funds however, this is not true for acompany stock.

2.There are many advantages that a fund that is actively managed willgenerate. The first advantage is that it is possible to outperformthe market. The fund has been able to do this for the last ten years.On the disadvantages, such stock has a chance of underperforming inthe market. Mutual funds do not outperform the market for anextended time. However, the management fee makes it hard tooutperform the market (Ross, Westerfield, &amp Jordan, 2008).

3.Investment is an individual choice. One can decide to invest in aless risky or more volatile investment. The kind of investment anindividual chooses depends on their level of risk tolerance. Aninvestor who is conservative will go for the Bledsoe small-cap fundon the other hand, an investor who is a risk taker will take therisk. The risk taker makes an assumption that with higher risks thereturns will also be high.

4. 10-year annual return standarddeviation

BledsoeS &amp P index fund9.18% 20.43%

Bledsoesmall-cap fund 14.12 25.13

Bledsoelarge-company stock fund8.58 23.82

Bledsoebond fund 6.45 9.85

Sharperatio is risk premium of asset (expected return-risk free rate)/itsstandard deviation

Assumeexpected return for the company is 16%, and standard deviation is 65%

Assumerisk-free rate is 3.2%

Sharperatio for company stock = (16-3.2)/65 =12.8/65 =0.2%

Sharperatio for Bledsoe S&amp P index fund will be(9.18-3.2)/20.43=5.98/20.43 = 0.29%

Sharperatio for Bledsoe small-cap fund is (14.12-3.2)/25.13 = 10..932/25.13= 0.43%

Sharperatio for Bledsoe large-company stock fund = (8.58-3.2)/23.82 =5.38/23.82 = 0.23%

Sharperatio for bond fund = (6.45-3.2)/9.85 = 3.25/9.85 =0.32%

Sharperatio is used to evaluate a portfolio’s performance. Furthermore,it makes it easy to compare different funds. It is calculated bydividing the risk premium by the standard deviation (Sharpe, 1994).

Ahigher Sharpe ratio is an indication that investors get a higherreturn for each unit of risk. A lower Sharpe ratio is a sign that theinvestor has higher risks to shoulder. The problem with Sharpe ratiois that for investments that are illiquid, it will reduce thestandard deviation of a portfolio. It is because of the volatility ofilliquid investments. The problem with the Sharpe ratio is that itdoes not work well with investments that do not have normaldistributions (Sharpe, 1994).

5.The portfolio that I would choose is the mutual fund. It allows fordiversification and has less risk. Furthermore, I would invest in aportfolio that is slightly above the minimum variance. There is nodoubt that with such a portfolio, I would be able to get higher ratesof return.

References

Jayadev,M. (1996). Mutualfund performance: an analysis of monthly returns.Finance India, 10(1), 73-84

Ross,S.A., Westerfield, R., &amp Jordan, B.D. (2008). Fundamentalsof corporate Finance.Tata McGraw-Hill Education

Sharpe,W.F. (1994). The Sharpe ratio. Thejournal of portfolio management,21(1), 49-58