A Job at East Coast Yachts Part 2
This assignment will help the student to incorporate real-life decision-making skills gained from formal finance instruction. As an employee of East Coast Yachts, the student is asked to determine if it is better to invest in a managed equity fund or the Vanguard 500 Index Fund (Ross, Westerfield, & Jaffe, 2013). Dan Erwin, who works in the finance area, has provided a graph to assist in the decision (Ross et al., 2013).
S&P 500 Index Fund
One of the options is a fund that follows the S&P 500 (Ross, Westerfield, & Jaffe, 2013). It requires little action, and therefore has minimal associated fees (Ross et al., 2013). The return in the Vanguard 500 fund is marginally different from the S&P 500 (Ross e al., 2013).
Large Company Stock Fund
The Large-Company Stock Fund is actively managed by a skilled professional (Ross, Westerfield, & Jaffe, 2013). Although the intent is improved performance, the fees are higher (Ross et al., 2013). A decision must be made regarding whether or not the return is worth the fees (Ross et al., 2013).
The East Coast Yachts case study presents three questions. The scholar is asked to (a) discuss implications drawn from the graph for mutual fund investors, (b) explain if the graph is consistent or inconsistent with market efficiency, and (c) decide and explain what investment decision should be made for the equity portion of the 401(k) account (Ross, Westerfield, & Jaffe, 2013).
Although at times the managed equity funds have outperformed the Vanguard 500 Index Fund, this may not always be the case (Ross, Westerfield, & Jaffe, 2013). Investors should be very careful with which mutual funds they choose to invest. During specific time frames mutual funds have significantly underperformed in relation to the Vanguard 500 Index Fund (Ross et al., 2013).
Relationship to Market Efficiency