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CHAPTER 13 C-1
CHAPTER 13
YOUR 401k ACCOUNT AT EAST COAST
YACHTS
1. Before the fact, you would expect that mutual funds managers would be able to outperform the market.
This is due, in part, to the Darwinian nature of the business. Good performing fund managers are richly
rewarded, and poor performing fund managers are fired, often very quickly. In reality, we should
expect that less than 50 percent of all equity mutual funds would outperform the market. This does not
market return by 1.50 percent before fees in order to achieve a return after fees equal to the market
return. Whether the market is efficient or inefficient is irrelevant unless mutual funds managers are
the best investors in the market, and all other investors, including private money managers, pension
2. The results in the graph tend to support the idea of market efficiency. Consider the case of the Fidelity
Magellan Fund, a large actively managed equity mutual fund. The total assets of the fund at the time
this was written was about $15 billion. So the question is this: What would Fidelity pay for one year
to increase the return of the Magellan Fund by .01 percent? If we multiply the fund assets by .01
percent, we get: $15,000,000,000(.0001) = $1,500,000. So, if Fidelity can increase the return of this
3. Given that the evidence presented tends to support market efficiency, you should invest in the S&P
500 index fund. However, this is not the entire answer. By investing the entire equity portion of your
account in the S&P 500 index, your portfolio is not diversified since the S&P 500 index includes only
large-cap stocks. Therefore, part of your equity investment should probably be in the small-cap fund
for diversification purposes. Note that a small-cap index fund may be the best option, but there is no
