If the market is efficient in the semi-strong form, then no matter what publicly

Question

If the market is efficient in the semi-strong form, then no matter what publicly nvailable information mutual fund managers rely on to pick stocks, their average returns should be the same as those of the average investors in the market as a whole This claim is confirmed by several financial press. For example, CNN money reporta that "86% of intest ment managers stunk in 2014" However, this evidence does not imply that mutual funds are bad investmente for individuals. Though these funds fail to achieve better returns than the market, they permit the investor to buy a portfolio of many stocks Suppose today you invest $1,000 in BRS mutual fund because you don't feel like to build a diversified portfolio by your own self. If the portfolios hold by BRS are believed to be well-diversified, then what kind of risk your investment should not bear? (i) Systematic risk (ii) Idiosyncratic risk 3. Suppose one BRS fund manager claims that adding T-bills to the portfolio could effectively lower the systematic risk of a portfolio. Would this argument be correct or not? Suppose your friend instead build his investment portfolio by his own self and he tells you that his homemade portfolio is also a well-diversified portfolio. If the portfolio constructed by your friend is well-diversified as what he claims, which one of the following should indicate the portfolio is being effectively diversified? (i) A decrease in the portfolio standard deviation (ii) A decrease in the portfolio beta

Explanation / Answer

3 (i) because idiosyncratic risk is not dependent on broader market movement. Systematic risk is the only risk that can be reduced by diversifying

4. he is right. T-bill diversify the overall portfolio risk

5.(ii) decrease in poitfolio beta i.ie correlation with the market indices should reduce with diversification of the portfolio

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