Bedhead Funds Leslie Grayson was given shares in Bender Growth Fund (ticker symbol: BEGAX) several years

ago by her mother s !arents" #ay and Gladys Lewis" to !rovide $or a college education% &n$ortunately" the mutual $und !er$ormed !oorly $rom '((( to '((' and '(() to '((*% +hat once was a ,'("((( college $und is now worth about ,-)".((" in the conte/t o$ a nearly a '%)0 annual decrease in the overall stock market over the same time !eriod% Although the $und !osts disa!!ointing returns year a$ter year and holds low !ros!ects $or turning around anytime soon" Leslie $inds it hard to sell the investment% 1he seems to be a long way $rom recovering the lost value o$ the initial investment% 2$ she sells now and the !ort$olio value increases later" the regret $rom cashing out her grand!arent3s $inancial legacy to her will be a heavy burden to bear% 2t was their gi$t to her% 4!en5end investment com!anies" !o!ularly called mutual $unds" sell ownershi! shares to the !ublic at their net asset value (6A7)% 4nce !urchased" the mutual $und shares may be sold back to com!any at the current 6A7% As the mutual $und s !ort$olio o$ securities becomes more valuable" the $und s 6A7 increases and shareholders can earn a !ro$it by selling shares back $or more than the !urchase !rice% 8he com!any s total asset si9e constantly changes as new shares are !urchased" old shares are sold back" and !ort$olio assets change value% Funds may charge a $ront5end $ee to cover the costs o$ selling the $und to investors" called a load% 8here may also be a redem!tion (back5end) $ee or distribution $ee% 8he average annual ratio o$ e/!enses5to5assets $or &1 stock $unds is about -%*(0" according to the 2nvestment :om!any 2nstitute ('((; Fact Book)% Leslie is a !atient investor with the $ew other securities she owns% 1he never sells at the $irst sign o$ trouble" !re$erring to use a buy5and5hold investment strategy% But she tends to let large sums accumulate in her checking account% Although her $inance5ma<or $riends advise her that stocks do better in the long run" she owns only $i/ed5income securities besides the mutual $und% 1he is sensitive to those same $riends comments that she is a sentimental investor% 8he mutual $und is on Leslie s mind because the =uarterly statement had recently been $orwarded $rom home% 2n order to bring hersel$ to sell the shares" Leslie wants to learn more about the $und% 1he knows about three !articularly hel!$ul +eb sites: 8he >utual Funds ?ome @age" Auicken and >orningstar% 8he $irst site has a section $or investors with little e/!erience in mutual $undsB the other two" an easy to use database o$ $und research% Free access to use$ul $eatures o$ the >orningstar site" such as $und $ee and e/!ense in$ormation" may re=uire $illing out a registration $orm% Leslie started her college education two and a hal$ years ago and <ust !aid this semester s tuition" !artly out o$ her own cash% 1he could easily cover a $ew additional living e/!enses in order to com!lete the semester% Leslie decides to call her cousin Ellen Lewis%

Auestions -% ?ow risky is this investment $or LeslieC Discuss how can the risk be =uanti$ied or measured%

1uggested #es!onse: 8his investment has been very risky $or Leslie since she received it" and her inability to !art with it is !utting her investment at $urther risk% Leslie needs to use the tools available to her online to com!are <ust how badly her $und has !er$ormed versus it s !eer grou!" and the market itsel$% 2$ it a!!ears that the $und is a laggard" or is tracking a sector that has been lagging the broad market" she should be =uick to sell the $und and re!lace it with a low5cost E8F or inde/ $und which is tracking a better !er$orming sector o$ the market% Also" Leslie should try to be less sentimental" or emotional about the investment" since her !rimary $ocus should be to see the investment grow over time% '% Detail two =uestions Leslie should ask her cousin Ellen Lewis and why they are im!ortant $or Leslie3s decision% 1uggested #es!onse: Leslie should ask her cousin to hel! her $ind out what the annual e/!ense ratio o$ the $und is" and how that com!ares to other mutual $unds" as well as to inde/ $unds and E8F s% 2t is likely that her $und s o!erating costs are much higher than alternative investment o!!ortunities available to her" which when com!ounded over a !eriod o$ many years can have a dramatic im!act on her overall return% 1he should also $ind out what the return o$ the 1E@ *(( has been over the same !eriod that she has been holding this mutual $und" $or com!arative !ur!oses% 2$ her $und is under!er$orming the broad market consistently" then should she dum! the $und and <ust buy an E8F or inde/ $und with the !roceeds% 2t makes no sense $or her to continue !aying higher management $ees through the mutual $und i$ the manager cannot out!er$orm the market over time%