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Chapter 04 - Mutual Funds and Other Investment Companies
c. Fees are a much higher fraction of expected earnings for the bond fund, and
therefore may be a more important factor in selecting the bond fund.
This may help to explain why unmanaged unit investment trusts are
concentrated in the fixed income market.
The advantages of unit investment
trusts are low turnover and low trading costs and management fees.
This is a
more important concern to bond-market investors.
29. Equity funds and fixed-income funds contain different types of securities. Therefore,
there are numerous differences that make comparison difficult. Equity funds invest
primarily in the common stock of publically traded firms. Fixed-income funds invest in
corporate bonds, Treasury bonds, mortgage-backed securities, or municipal (tax-free)
bonds. The risks associated with stocks are primarily related to economic conditions
and the success of the business operations.
The risks associated with fixed-income
securities are primarily interest rate risk and credit risk.
30. Suppose that finishing in the top half of all portfolio managers is purely luck, and that
the probability of doing so in any year is exactly ½.
Then the probability that any
particular manager would finish in the top half of the sample five years in a row is (½)
5
= 1/32.
We would then expect to find that [350
(1/32)] = 11 managers finish in the
top half for each of the five consecutive years.
This is precisely what we found.
Thus,
we should not conclude that the consistent performance after five years is proof of skill.
We would expect to find eleven managers exhibiting precisely this level of
"consistency" even if performance is due solely to luck.
Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written
consent of McGraw-Hill Education.


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