Question

1. The following table reports the average 5-year returns from 2012-2016 for the top 10 performing mutual funds out of the 200 funds that invest only in large market cap U.S. equities. The corresponding return on the Standard and Poor’s 500 Index for the same period was negative 3.5% (the last row of the table).

Fund	Average 5-year return%
Rajaratnam Funds Inc	24
Martha Stewart Partners	15
Carl Icahn Investments	12
Banguard Aggressive Growth Fund	10
BlackSock International	9
Viking Global Investors	7.5
Mon Group	6
Lost Pine Capital	6
D.B. Shaw & Co.	3.2
Slowpoke Investors	1.5
S&P 500 Index	-3.5

Your study buddy says “Since these funds have outperformed the S&P 500, this is evidence against the efficient markets hypothesis.” Do you agree or disagree with your study buddy? Explain why/why not.

Answer 1

We cant conclude Efficient market hypothesis is wrong based on this data. The sample selected here is top performing 10 mutual fund and not randomly selected. If to prove efficient market hypothesis is wrong, we need to select a decent amount of sample size( mutual funds) randomly and evaluate it for a longer period.

Taking only 10 top performing fund for 6 years itself brings the bias in selecting such funds. These funds are selected because they are over performing. Comparing the overperforming funds we selected and then deciding efficient market hypothesis is wrong is statistically not correct.

According to studies, for a 10 year period 70% of mutual fund managers under perform the parket and for 20 year period 80% of funds underperform the parket. This is enough to prove that efficient market hypothesis cant be rejected and there is no clear evidence which shows otherwise.