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Tennis elbow is a painful condition that afflicts many tennis players at some time. A number of different treatments are used for this condition, including rest, heat, and anti-inflammatory medications. A clinical trial was conducted among 87 participants, comparing the effectiveness of Motrin (generic name, ibuprofen), a widely used anti-inflammatory agent, vs. placebo. Participants received both drug and placebo, but the order of administration of the two was determined by randomization. Specifically, approximately half the participants (group A) received an initial 3-week course of Motrin, while the other participants (group B) received an initial 3-week course of placebo. After the 3-week period, participants were given a 2-week washout period during which they received no study medication. The purpose of the washout period was to eliminate any residual biological effect of the first-course medication. After the washout period, a second period of active drug administration began, with group A participants receiving 3 weeks of placebo, and group BB participants receiving 3 weeks of Motrin. At the end of each active drug period as well as at the end of the washout period, participants were asked to rate their degree of pain compared with baseline (before the beginning of the first active drug period). The goal of the study was to compare the degree of pain while on Motrin vs. the degree of pain while on a placebo. This type of study is called a cross-over design, which we discuss in more detail in Chapter 13.

Degree of pain vs. baseline was measured on a 1-6 scale, with 1 being "worse than baseline" and 6 being "completely improved." The comparison was made in four different ways: (1) during maximum activity, (2) 12 hours following maximum activity, (3) during the average day, and (4) by overall impression of drug efficacy. The data are given in Data Set TENNIS2.DAT with documentation in TENNIS2. DOC, both at

Compare degree of pain while on Motrin with degree of pain on placebo during maximal activity.


After much research on the developing economy and capital markets of the country of Otunia, your firm, GAC, has decided to include an investment in the Otunia stock market in its Emerging Markets Commingled Fund. However, GAC has not yet decided whether to invest actively or by indexing. Your opinion on the active versus indexing decision has been solicited. The following is a summary of the research findings:

Otunia’s economy is fairly well diversified across agricultural and natural resources, manufacturing (both consumer and durable goods), and a growing finance sector. Transaction costs in securities markets are relatively large in Otunia because of high commissions and government “stamp taxes” on securities trades. Accounting standards and disclosure regulations are quite detailed, resulting in wide public availability of reliable information about companies’ financial performance. 

Capital flows into and out of Otunia, and foreign ownership of Otunia securities is strictly regulated by an agency of the national government. The settlement procedures under these ownership rules often cause long delays in settling trades made by nonresidents. Senior finance officials in the government are working to deregulate capital flows and foreign ownership, but GAC’s political consultant believes that isolationist sentiment may prevent much real progress in the short run.

a. Briefly discuss aspects of the Otunia environment that favor investing actively, and aspects that favor indexing.

b. Recommend whether GAC should invest in Otunia actively or by indexing. Justify your recommendation based on the factors identified in part ( a).


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Answered 2 years ago
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Factors in favor of active management:

  1. Detailed accounting standard and good financial disclosure: The basic analysis of the research can be done by a trained analyst who has reliable and detailed knowledge of accounting standards and finances in order to identify securities that do not have efficient prices.

(If financial and accounting information is published through indexing, the market will be more efficient but the value of management and analysis will decline).

  1. Developments in the economic and securities markets are the result of rapid economic growth and change, where securities do not have a fair price. Active investors can benefit from these opportunities.

  2. Active investors can use top-down strategies because there is a possibility due to diversity among different sectors of the economy of the state of Otunia.

(By indexing, the risk associated with individual industries can be avoided).

  1. High transaction costs: Trading activities will be discouraged due to the high transaction costs of international investors which will result in inefficiencies that can be exploited as an opportunity for active investors.

(Lower costs and reduced economic activity will support indexing).

  1. Capital flow restrictions can disappoint foreign investors by limiting their participation and serving only the Otunia state market which can result in market inefficiencies that active investors can take advantage of.

(A smaller trading volume and a capital constraint would benefit indexing)

  1. Domestic investors may benefit from securities whose price is unrealistic due to delays in the markets of foreign investors. This may discourage foreign investors.

(Industries that have less settlement problems resort to indexing).

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