Question

A work colleague was bragging that the actively managed mutual fund he selected among your employer’s 401(k) electives outperformed the S&P 500 over the past 3 years. The colleague (who did not take FINC 561) claims that it’s a great fund, that the manager is a genius and is urging you to invest in that fund as well.

However, you believe that markets are efficient. Do you take your colleague’s advice? Explain your rationale by applying concepts of market efficiency learned so far in the course. Include whether the mutual fund’s performance violates or disproves efficient markets and why or why not?

Answer 1

No i wont take my colleagues advice. the fact that he has managed to outperform the markets won't change my stand because of the fact that the markets are efficient and they discount every news that is available already to the public at large. The Mutual funds have outperformed the markets this shows that the markets were inefficient and thus the mutual fund was able to reap profits more than markets. The markets did not discount the news flow and was reactive rather than proactive. However the present market scenario shows that the news must have been discounted and also should have reflected in the markets.