Which of the following phenomena would be either consistent with or a violation of the efficient market hypothesis? Explain briefly. a. Nearly half of all professionally managed mutual funds are able to outperform the S&P 500 in a typical year. b. Money managers who outperform the market (on a risk-adjusted basis) in one year are likely to outperform in the following year. c. Stock prices tend to be predictably more volatile in January than in other months. d. Stock prices of companies that announce increased earnings in January tend to outperform the market in February. e. Stocks that perform well in one week perform poorly in the following week.

Lon on to www.fidelity.com and look at the list of mutual funds that are managed by Fidelity. Some of these funds, such as the Aggressive Growth Fund, appear from their names to be high-risk. Others, such as the Balanced Fund, appear to be low-risk. Pick several high- and low-risk funds and then check whatever their betas really do match the fund's name.

How are contributions to governmental funds as well as special or extraordinary items reported on the governmental funds' statement of revenues, expenditures, and changes in fund balance?

Is the federal funds rate the same as the discount rate?

Imagine you have $15,000 of funds to invest. Which type of funds or investments discussed in this section would you choose? Explain your answer..

What are the best Closed-End funds?

Why are banks willing to lend funds to people?

A monopolist earns $\$ 30$ million annually and will maintain that level of profit indefinitely, provided that no other firm enters the market. However, if another firm enters the market, the monopolist will earn $\$ 30$ million in the current period and $\$ 15$ million annually thereafter. The opportunity cost of funds is $10$ percent, and profits in each period are realized at the beginning of each period.

a. What is the present value of the monopolist's current and future earnings if entry occurs?

b. If the monopolist can earn $\$ 16$ million indefinitely by limit pricing, should it do so? Explain.

Visit the web site of an investment company that offers a family of mutual funds (such as Vanguard or Fidelity). Select five of the company's funds that are very different from each other. Describe the investment objective(s) and risk level for each of the five funds. Draw a graphic that visually displays risk level, going from least risky to most risky. On the graph, identify the most risky fund you selected and the least risky fund. Then place the three other funds at their appropriate risk levels in between the two extremes. In a paragraph, summarize what you learned about mutual funds and risk.

The “expense ratio” is a measure of the cost of managing the portfolio. Investors prefer a low expense ratio, all else equal. Below are expense ratios for 23 randomly chosen stock funds and 21 randomly chosen bond funds. (a) Calculate the mean and median for each sample. (b) Compare central tendency in expense ratios for stock funds and bond funds. (c) Calculate the standard deviation and coefficient of variation for each sample. (d) Which type of fund has more variability? Explain. (Data are from Money 32, no. 2 [February 2003]. Stock funds were selected from 1,699 funds by taking the 10th fund on each page in the list. Bond funds were selected from 499 funds by taking the 10th, 20th, and 30th fund on each page in the list.)

23 Stock Funds

$$\begin{array}{lllllllllll}1.12 & 1.44 & 1.27 & 1.75 & 0.99 & 1.45 & 1.19 & 1.22 & 0.99 & 3.18 & 1.21 \\ 0.60 & 2.10 & 0.73 & 0.90 & 1.79 & 1.35 & 1.08 & 1.28 & 1.20 & 1.68 & 0.15\end{array}$$

21 Bond Funds

$$\begin{array}{llllllllllll}1.96 & 0.51 & 1.12 & 0.64 & 0.69 & 0.20 & 1.44 & 0.68 & 0.40 & 0.94 & 0.75 & 1.77\end{array}$$

A sum of $5000 is invested in three mutual funds that pay 3%, 4%, and 6% interest rates. The amount of money invested in the fund paying 6% equals the total amount of money invested in the other two funds, and the total annual interest from all three funds is$240. Find the amount invested at the rate.

The American Association of Individual Investors publishes an annual guide to the top mutual funds (The Individual Investor’s Guide to the Top Mutual Funds, 22e, American Association of Individual Investors, 2003). The total risk ratings for 29 categories of mutual funds are as follows.

$$\begin{matrix} \text{ } & \text{Number of Fund}\\ \text{Total Risk} & \text{Categories}\\ \text{Low} & \text{7}\\ \text{Below Average} & \text{6}\\ \text{Average} & \text{3}\\ \text{Above Average} & \text{6}\\ \text{High} & \text{7}\\ \end{matrix}$$

It turns out that 11 of the fund categories were bond funds. For the bond funds, seven categories were rated low and four were rated below average. Compare the total risk of the bond funds with the 18 categories of stock funds.

An article in Fortune magazine reported on the rapid rise of fees and expenses charged by mutual funds. Assuming that stock fund expenses and municipal bond fund expenses are each approximately normally distributed, suppose a random sample of $12$ stock funds gives a mean annual expense of $1.63$ percent with a standard deviation of $.31$ percent, and an independent random sample of $12$ municipal bond funds gives a mean annual expense of $0.89$ percent with a standard deviation of $.23$ percent. Let $\mu_1$ be the mean annual expense for stock funds, and let $\mu_2$ be the mean annual expense for municipal bond funds. Do parts $a, b$, and $c$ by using the equal variances procedure. Then repeat $a, b$, and $c$ using the unequal variances procedure. Compare your results.

Calculate a $95$ percent confidence interval for the difference between the mean annual expenses for stock funds and municipal bond funds. Can we be $95$ percent confident that the mean annual expense for stock funds exceeds that for municipal bond funds by more than $.5$ percent? Explain.

The following exercise is a problem that may require permutations, combinations, or the multiplication principle.

A financial advisor offers 8 mutual funds in the high-risk category, 7 in the moderate-risk category, and 10 in the low-risk category. An investor decides to invest in 3 high-risk funds, 4 moderate-risk funds, and 3 low-risk funds. How many ways can the investor do this?