Mini-Case Study: Your 401(K) Account at East Coast Yachts
For this paper, I will send the file that contains the case study to be use for this paper via the files upload.
it is important to respond to the questions mentioned detail.
Mini-Case Study: Your 401(k) Account at East Coast Yachts
This case study, found on page 472 of your course text, is a continuation of the one you began last week.
After carefully reading the new information presented, briefly respond to the three questions at the end (4
to 6 sentences each).
What implications do you draw from the graph for mutual funds?
MINI-CASE STUDY: YOUR 401(K) ACCOUNT AT EAST COAST YATCHS 2
According to Bruce (2003), mutual funds help investors to save for their retirements and
other financial goals due to huge benefits that come from investment diversification and
professional management. The initial implication from the graph is that different funds perform
differently over time and the investor has the option of choosing the best fund in accordance with
his own analysis. From the graph, it is evident that the performance of mutual funds increases
with time based on the level of investment. From the date of inception, a considerable growth is
realized in mutual funds over time. In the above graph, the performance of the equity mutual
funds is higher than the Vanguard 500 Fund. With this regard, an investor is likely to reap huge
for investing in equity mutual fund than Vanguard 500 Fund. However, an investor who invests
in the Vanguard 500 Fund is still able to realize considerable level of growth for despite it being
relatively lower than the equity mutual fund.
Is the graph consistent or inconsistent with the market efficiency?
When the money is put in the market, the aim is to generate more profits in return for the
capital invested (Bailey & Lopez-de-Prado, 2013). In addition to making profitable returns, the
investors in the market also try to outshine other markets. If the markets became less efficiency
there would then be fewer returns on average and very high volatility when it comes to
investment (Wilmott, 2007). The liquidity would not be able to impend the market approach and
this would end up changing efficiency in terms of production of goods and services (Ross &
Westerfield, 2013). On the other side, if US market became less efficient, then there would be no
accurate information on market issues and there benefit in the market would be very low. When
the market is not efficient, the market would become very unpredictable for investment and this
is likely to affect the rate of investment. This graph is in consistent with the market efficiency
curve since different investment portfolios compete efficiently in the market. Due to high returns
MINI-CASE STUDY: YOUR 401(K) ACCOUNT AT EAST COAST YATCHS 3
on the equity mutual fund, the markets seem very efficient since such returns can only be
achieved by less market volatility. A graph that is inconsistent with the market forces portrays
irregular lines that have are can hardly be predicted by the investors.
What investment decision would you make for the equity portion of your 401(k) account?
In my opinion, the best investment decision to roll over some portion of the 401(K) so
that it can be invested in individual stocks. Since the investor has a sizeable amount tied to the
company’s 401(K), there is high likelihood that such investment will gain good benefits in
return. According the historic performance, the funds are doing reasonably well and it is
somehow safe for the investor to take a portion and gamble with some portfolio investment. In
this arrangement, the investor can roll over more funds to the equity mutual fund that allows him
to invest in high yielding portfolio. On the other hand, I would avoid investing in the Vanguard
500 Fund since it gives less return in the long run when compared to equity mutual funds.
Despite having high fees, the equity mutual funds are profitable since the anticipated returns will
cater for the high fees involved.
References
MINI-CASE STUDY: YOUR 401(K) ACCOUNT AT EAST COAST YATCHS 4
Bailey, D. &Lopez-de-Prado, M. (2013): “The Strategy Approval Decision: A Sharpe Ratio
Indifference Curve approach”, Algorithmic Finance 2 (1): 99-109
Bruce J. F. (2003). Investment Performance Measurement. New York: Wiley
Ross, S. R., Westerfield, R. W., & Jaffe, J. (2013). Corporate finance (10 th ed.). NY: McGraw-
Hill.
Wilmott, P. (2007). Paul Wilmott introduces Quantitative Finance (Second Ed.). Wiley
