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CHAPTER 13 CASE C-1
CHAPTER 14
YOUR 401(k) ACCOUNT AT EAST COAST
YACHTS
1. Before the fact, you would expect that mutual fund 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
depend on the level of market efficiency. Consider the following question: What percentage of
investors will outperform the market in a given year? Answer: Fifty percent. While there could be one
by 1.50 percent before fees 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 fund managers, individuals, etc.
2. The results in the graph tend to support the idea of market efficiency. Consider the case of the Fidelity
Magellan Fund, one of the largest actively managed equity mutual funds at the time this was written.
The total assets of the fund at the time this was written was about $22.4 billion. So, the question is
this: What would Fidelity pay for one year to increase the return of the Magellan Fund by .01 percent?
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
