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Unformatted text preview: Case 2 Han Zhang Question 1 All the S&P 500 mutual funds are supposed to be all the same, except the difference of expense ratio, load and 12b-1 fee. Therefore, assume that we are now holding an E*TRADE S&P 500 Index (ETSPX) mutual fund, to see which of the following would be the best asset addition for reducing the investment risk in DJIA, Mexico, India, Sweden and Venezuela, first of all, let’s do some basic analysis on the fund itself. The fund seeks to provide investment results that match as closely as predictable, before fees and expenses, the total return of the stocks comprising the S&P 500 index. The fund invests 96.9% of assets in stocks making up the S&P 500 and 3.1% in money market. And its sector breakdown consists of 16.33% in energy, 14.05% in financial service, 12.96% in industrial materials, 11.92% in healthcare and 9.82% in hardware. The weightings are fairly standard compared with those of its peers. Moreover, its peers are fairly index-like on average. This offering tends to be less volatile than more-concentrated offerings because they are so broadly diversified and at least from the standpoint of its sector weightings, is a suitable core holding. Its five-year returns are fairly average. By focus on five-year returns is because longer records have greater predictive power than shorter records. Since this fund's returns are merely average, we see that the fund earns 3 stars under Morningstar's rating methodology, meaning that compared with other funds in its category, it has historically generated average returns given the amount of risk it has taken on. Whereas some funds end up with 3 stars because they turned out high returns with high risk, and others because they turned out low returns with low risk, overall this fund has had both fairly average returns and fairly average risk. Finally, this fund falls in the middle of the blend area of the style box and it mainly focus on stocks that have decent growth prospects, then they tend to be more volatile than value funds. Based on the analysis above, we now need to have a look at the main five stock market that we would like best to add in the asset. Due to the credit crisis, Dow Jones has vaporized almost 50%, the market is extremely volatile. It almost fell into where it was the index level in 2003. By comparing with the ETSPX fund itself during the past five years, they perform almost the same trend, additionally S&P 500 mutual fund invest the stock that are marking up the S&P 500, therefore the performance of ETSPX is exactly how S&P 500 index has done. There’s no doubt that both DJIA and S&P 500 are highly positive related, to make an asset addition in DJIA will not increase our investment risk instead of reducing. With the same reason which we have concluded from DJIA, Mexico IPC index, India Sensex index and Sweden OMX index have 90% similarity with DJIA, especially Swedish stock market, which has also fallen into 2003 level, about 57% decline. While Mexico and India’s similarity with DJIA, especially Swedish stock market, which has also fallen into 2003 level, about 57% decline....
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This note was uploaded on 11/01/2011 for the course ACC 200 taught by Professor Minliu during the Spring '11 term at Universidad Europea de Madrid.
- Spring '11