Finance research has shown that managers of actively managed mutual funds or exc

Question

Finance research has shown that managers of actively managed mutual funds or exchange traded funds (ETF), on average, do not outperform the overall stock market as measured by the S&P 500 index. In some years, more than 80% of fund managers were unable to beat the overall stock market. The year 2013 is a good example when the S&P 500 yielded nearly 29% return, which was better than the average return on 95% of actively managed stock portfolios with similar risk. (a) If you believe these results which seem to support informational efficiency of equity markets in U.S., what would be your investment strategy so that your average long-run returns are better than the returns realized by more than two-third (75%) of professional money managers of actively traded funds. Explain. (b) If equity markets are efficient and rational to a larger extent, how would you explain the stock market bubble of 2008 in the presence of efficient markets. Please limit your answers to no more than twenty (20) sentences.

Explanation / Answer

Ans (a)- Though in 2013 S&P 500 yeilded a good return to investors, but During 2015 and 2016 the US stock market was very much volatile. Because of the currency devaluation of china, oil price drop, incident of Greece, Brexit and US election the stock market had fallen sharp. But still that yeilded a good return to investors around 8%. So looking at these trend , for achieving a good long-term return, my investment strategy would be a bit conservative, i.e investing around 50% in Bond, 25% in Foreign stocks and 25% in US stock market for short term investments (pref. in derivatives).

Ans (b)- Even though equity markets in US is efficient and rational to a large extent but ultimately it runs on people's psychology. This was all beacuse of the subprime loan crisis in the US. Because of that stocks of real estate sector started falling. Some market theorists believe that when destablization in market occurs , then this incident will be followed by some other incidents at a chain which will trigger price to fall more. As the same way, this incident affected many other asset classes, which in tern affected world's large banks. The situation got worsen after fall of FNMA and FHLMC followed by bankruptcy of Lehman brothers and many more.

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