Mini-Case Study at East Coast Yachts
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Mini-Case Study: Your 401(k) Account at East Coast Yachts
This case study, found on page 472 of your course text, is a continuation of the one you began last week. After carefully reading the new information presented, briefly respond to the three questions at the end (4 to 6 sentences each).
SAMPLE ANSWER
Mini-Case Study at East Coast Yachts
What implications do you draw from the graph for mutual funds?
According to Bruce (2003), mutual funds help investors to save for their retirements and other financial goals due to huge benefits that come from investment diversification and professional management. The initial implication from the graph is that different funds perform differently over time and the investor has the option of choosing the best fund in accordance with his own analysis. From the graph, it is evident that the performance of mutual funds increases with time based on the level of investment. From the date of inception, a considerable growth is realized in mutual funds over time. In the above graph, the performance of the equity mutual funds is higher than the Vanguard 500 Fund. With this regard, an investor is likely to reap huge for investing in equity mutual fund than Vanguard 500 Fund. However, an investor who invests in the Vanguard 500 Fund is still able to realize considerable level of growth for despite it being relatively lower than the equity mutual fund.
Is the graph consistent or inconsistent with the market efficiency?
When the money is put in the market, the aim is to generate more profits in return for the capital invested (Bailey & Lopez-de-Prado, 2013). In addition to making profitable returns, the investors in the market also try to outshine other markets. If the markets became less efficiency there would then be fewer returns on average and very high volatility when it comes to investment (Wilmott, 2007). The liquidity would not be able to impend the market approach and this would end up changing efficiency in terms of production of goods and services (Ross & Westerfield, 2013). On the other side, if US market became less efficient, then there would be no accurate information on market issues and there benefit in the market would be very low. When the market is not efficient, the market would become very unpredictable for investment and this is likely to affect the rate of investment. This graph is in consistent with the market efficiency curve since different investment portfolios compete efficiently in the market. Due to high returns on the equity mutual fund, the markets seem very efficient since such returns can only be achieved by less market volatility. A graph that is inconsistent with the market forces portrays irregular lines that have are can hardly be predicted by the investors.
What investment decision would you make for the equity portion of your 401(k) account?
In my opinion, the best investment decision to roll over some portion of the 401(K) so that it can be invested in individual stocks. Since the investor has a sizeable amount tied to the company’s 401(K), there is high likelihood that such investment will gain good benefits in return. According the historic performance, the funds are doing reasonably well and it is somehow safe for the investor to take a portion and gamble with some portfolio investment. In this arrangement, the investor can roll over more funds to the equity mutual fund that allows him to invest in high yielding portfolio. On the other hand, I would avoid investing in the Vanguard 500 Fund since it gives less return in the long run when compared to equity mutual funds. Despite having high fees, the equity mutual funds are profitable since the anticipated returns will cater for the high fees involved.
References
Bailey, D. &Lopez-de-Prado, M. (2013): “The Strategy Approval Decision: A Sharpe Ratio Indifference Curve approach”, Algorithmic Finance 2 (1): 99-109
Bruce J. F. (2003). Investment Performance Measurement. New York: Wiley
Ross, S. R., Westerfield, R. W., & Jaffe, J. (2013). Corporate finance (10th ed.). NY: McGraw-Hill.
Wilmott, P. (2007). Paul Wilmott introduces Quantitative Finance (Second Ed.). Wiley
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