Your 401 (k) Account at East Coast Yachts
You have been at your job for East Coat Yachts for a week now and have decided you need to sign up for the company’s 401(k) plan. Even after your decision with Sarah Brown, the Bledsoe Financial Services Representative, you are still unsure as to which investment option you should choose. Recall that the options available to you are stock in East Coast Yachts, the Bledsoe S&P 500 index fund, the Bledsoe Small-cap fund, the Bledsoe Large-Company Stock Fund, the Bledsoe Bond Fund, and the Bledsoe Money Market Fund. You have decided that you should invest in a diversified portfolio, with 70 percent of your investment in equity, 25 percent in bonds, and 5 percent in the money market. You have decided to focus your equity investment on large-cap stocks, but you are debating whether to select the S&P 500 Index fund or the Large-Company Stock Fund.
In thinking it over, you understand the basic difference in the two funds. One is a purely passive fund that replicates a widely followed large-cap index, the S&P 500, and has low fees. The other is actively managed with the intention that the skill of the portfolio manager will result in improved performance relative to an index. Fees are higher in the latter fund. You’re just not certain on which way to go, so you ask Dan Ervin, who works in the company’s finance area, for advice.
After discussing your concerns, Dan gives you some information comparing the performance of equity mutual funds and the Vanguard 500 index fund. The Vanguard 500 in the world’s largest equity index mutual fund. It replicates the S&P 500, and it’s return is only negligibly different from the S&P 500. Fees are very low. As a result, the Vanguard 500 is essentially identical to the Bledsoe S&P 500 index fund offered in the 401k plan, but it has been in existence for much longer, so you can study its track record for over two decades. The graph on the following page summarizes Dan’s comments by showing the percentages of equity mutual funds that outperformed the Vanguard 500 fund over the previous ten years. So for example, from January 1977 to December 1986, about 70 percent of equity mutual funds outperformed the Vanguard 500. Dan suggests that you study the graph and answer the following questions:
1. What implications do you draw from the graph for mutual fund investors?
2. Is the graph consistent or inconsistent with market efficiency? Explain carefully.
3. What investment decision would you make for the equity portion of your 401k account? Why?
The Percentage of Actively Managed Equity Funds Beating the Vanguard 500 Index Fund: 10 Year Returns
pls respond to the above question by 12:00 PM CENTRAL TIME ON 10/25/10. MOST URGENT NEEDED ON MONDAY
Moore Money Inc. has a profit margin of 11% and a retention ratio of 70%. Last year, the firm had sales of $500 and total assets of $1,000. The desired total debt ratio is 75%. What is the firm's sustainable growth rate?
To answer the questions based on the graph provided, let's analyze the information step by step:
1. What implications do you draw from the graph for mutual fund investors?
The graph shows the percentages of actively managed equity mutual funds that outperformed the Vanguard 500 Index Fund over the previous ten years. From the graph, we can observe that the percentage of funds outperforming the Vanguard 500 Index Fund varies over time. In some periods, a higher percentage of funds outperform the index, while in other periods, a lower percentage outperforms.
This implies that actively managed funds have varying degrees of success in consistently outperforming the Vanguard 500 Index Fund. It suggests that picking an actively managed fund might not guarantee superior performance compared to a passive index fund like the Vanguard 500.
2. Is the graph consistent or inconsistent with market efficiency? Explain carefully.
The graph is consistent with the concept of market efficiency. Market efficiency implies that prices of securities reflect all available information and that it is difficult for investors to consistently outperform the market.
In this case, if the majority of actively managed equity mutual funds consistently outperformed the Vanguard 500 Index Fund, it would suggest that the market is not efficient. However, the graph shows that the percentage of funds outperforming the index fluctuates over time, with no consistent pattern. This suggests that the market is relatively efficient, and it is challenging for actively managed funds to consistently beat the index.
3. What investment decision would you make for the equity portion of your 401k account? Why?
Based on the information given, it seems that the Bledsoe S&P 500 Index fund (which replicates the Vanguard 500 Index Fund) would be a suitable choice for the equity portion of your 401(k) account.
The graph indicates that actively managed funds have a varying success rate in outperforming the Vanguard 500 Index Fund over time. Since there is no consistent pattern of outperformance, it might be wise to choose a passive index fund with low fees, such as the Bledsoe S&P 500 Index fund. This option provides exposure to a diversified portfolio of large-cap stocks while minimizing costs.
Additionally, the fact that the Vanguard 500 fund has been in existence for over two decades allows for studying its track record, which reinforces its reliability as a benchmark for comparison.
Overall, the decision to choose the Bledsoe S&P 500 Index fund aligns with the goal of investing in a diversified portfolio and minimizing expenses.