Questions on Mutual Funds

676 WordsJan 8, 20183 Pages
401K Account 1. What implications do you draw from the graph for mutual fund investors? For the ten years preceding 1988, most actively managed mutual funds outperformed the Vanguard 500 index fund by a wide margin. But, beginning in 1988, the number of equity funds outperforming the Vanguard 500 fell below 50% and has only achieved 30% once in that period. Ideally, one would expect that at least 50% of actively managed funds would be able to exceed the return of the S & P 500, especially when you consider the higher fees involved when compared with an index fund. But upon analyzing this chart, it is evident that since at least 1980 only 30% or less of all managed funds have managed to beat the Vanguard 500. As an investor, one should demand far better performance for their investment. Managed funds are run by investment professionals who should have a better understanding of market fluctuations. It is clear from this graph that, since less than half of the managed funds beat the Vanguard 500, that an investor has less than a 50-50 chance of picking the correct fund to return a better investment than would be returned by the index fund. 2. Is the graph consistent or inconsistent with market efficiency? Explain carefully. Market efficiency is defined as the correction in stock price that occurs when a stock is either overvalued or undervalued (Barnes, 2009, p.4). In theory, this is supposed to account for fluctuations in the market, creating a self-correcting stock

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