In the seven years since she graduated from Harvard Business School, Sally Jameson1 had done quite well. She had left her first job, at Telstar Communications, after working there for six years, and last year became the Director of Marketing for an Internet startup, Everythingsadotcom.Com. While at Telstar, Sally had accumulated 10,200 shares in Telstar stock, from assorted option grants, company-subsidized purchases of shares, and direct investments in the firm. A little after she left the firm, Telstar had been acquired by a larger telecommunications firm, BigBroadBand, Inc. (BBB), a firm with an equity market capitalization of over $15 billion. Her shares in Telstar were exchanged one-for-one for BBB shares, and the rising equity markets, compounded with the extremely attractive performance of BBB, made Sally's BBB investment worth over $800,000, which represented over 70% of her personal portfolio. (Exhibit 1 gives market data on BBB shares and options.) The remainder of her tangible portfolio was composed of her retirement plan, which was invested in an Index Fund whose performance tracked the Standard and Poors Index, and in about a dozen Internet stocks which Sally followed daily. In addition to an annual income of $110,000, she also had been granted 25,000 options on Everythingsadotcom.com, struck at $1.00 per share, but since the firm was at least a year from a possible IPO, she didn't think about them very much.
Sally's fascination with tracking ...