Question

Part 1 of 2 - Graph to follow

You have decided to diversify a portfolio with 70% invested in large-cap equities, 25 % in bonds and 5% in a money market fund. The information you have been given is that Vanguard 500Index Fund is essentially identical to your index funds. For the 20 investment periods shown in the graph (1986-2014), in only 7 of these periods did more than 50 % of the mutual fund managers beat the Vanguard 500 Index Fund. Using the graph- Is the graph consistent with market efficiency and what investment would you make with the equity portion of your account?

Please explain your steps and rational, I am really trying to understand this

Percent

Answer 1

1) This is clearly given that more than 50% of mutual fund managers were successful to beat the index fund in the ratio of 7:20 and for the rest of the 13:20 ratio, fund managers at least were successful in beating the index fund.

2) This is clearly evident that the mutual funds are performing really well as compared to the direct investment.

3) Mutual funds are basically for those who do not want to or are not expert enough to manage their portfolio. Therefore investing through mutual funds may provide safer returns.

4) Because we want to manage our portfolio according to diversification wherein 70% of the funds are planned to be in large-cap funds.

5) Because the index fund includes majorly large-cap funds, we can consider investing our 70% funds as planned but through mutual funds which evidently beat the index funds for twenty years.