Corporate Finance East Coast Yachts I My Corporate

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Corporate Finance

East Coast Yachts I

My time horizon is long-run. I would want a diversified portfolio, but can afford to take the risk of equities. So the first decision is to go with 100% equities. I am not interested in company stock at the moment, because I want a diversified portfolio and I only want liquid securities with values set by the market. The company stock does not meet those criteria.

In that case, I would emphasize the Small Cap fund for its growth characteristics -- 50%, and a further 50% in the S&P index fund. The Index Fund has a substantially lower MER than the Large Company fund. The Large Cap has outperformed the market lately, but cannot be expected to do that every year, and it has a lower Sharpe ratio so is a riskier fund that the S&P -- it should outperform. On a risk-adjusted basis, net of the MER, I feel that the Index Fund is a better investment than the Large Cap. Thus 50% in Index Fund, 50% in Small Cap.

East Coast Yachts II

Sarah should point out a few things about investing entirely in the stock.

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The first is that a portfolio should have a higher degree of diversification to insulate against adverse performance of a single asset. If anything were to happen to East Coast Yachts, the retirement fund could be wiped out, something that would not happen if I had a more diversified portfolio.

Indeed, since my income is tied to this company today, it makes no sense for my retirement to also be tied to the fortunes of the same company, if I am not the CEO and calling the shots. Sarah should point out that the retirement fund should insulate me from adverse conditions at any one company, and should therefore be diversified to achieve that goal. She should offer one or more funds as a means of supplementing the company stock, so that the portfolio has a high level of diversification.

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1. The capital structure of Dell (as of December 2009) is 83.9% debt and 16.1%….....

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