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Week 2 Assignment-Ethics in Financial Services
Maruthi Nallapati
Forbes School of Business and Technology
FIN 680
Marcus Crawford
26/9/2023
1
Active versus Passive Management
Return Performance
Description
1 Year
3 Year
5 Year
10
Year
Voya Large-Cap Growth Fund Class I (PLCIX)
18.13%
4.84%
9.97%
12.87
%
S&P 500 TR USD2Benchmark
19.44%
11.28
%
10.16
%
11.97
%
Northern Income Equity Fund NOIEX (JICAX1)
17.60%
9.39%
8.92%
10.87
%
S&P 500 TR USD2Benchmark
19.44%
11.28
%
10.16
%
11.97
%
MFS Blended Research Value Equity Fund Class
A (BRUDX)
21.89%
12.06
%
10.72
%
12.30
%
S&P 500 TR USD2Benchmark
19.44%
11.28
%
10.16
%
11.97
%
American Funds American Mutual Fund® Class F-
1 (AMFFX)
16.20%
12.15
%
8.80%
10.42
%
S&P 500 TR USD2Benchmark
19.44%
11.28
%
10.16
%
11.97
%
Northern Income Equity Fund NOIEX (NOIEX1)
6.80%
9.27%
7.85%
9.69%
S&P 500 TR USD2Benchmark
19.44%
11.28
%
10.16
%
11.97
%
Return Performance of Actively Managed Funds
The Voya Large-Cap Growth Fund Class I (PLCIX) has underperformed the S&P 500 TR
USD2 benchmark in all time periods analyzed (1 year, 3 years, 5 years, and 10 years). This
means that the fund has generated lower returns for investors compared to the benchmark.
Over the past year, the fund has returned 18.13%, slightly lower than the benchmark's
return of 19.44%. Over the longer term, the fund's 3-year and 5-year returns have also been
lower than the benchmark's, indicating that the fund has not been able to keep up with the
2
market's performance over that time period. However, over a 10-year period, the fund's returns
have been slightly higher than the benchmark's, suggesting that the fund's active management
may have led to some outperformance over a longer time horizon.
The return performance of the Northern Income Equity Fund (NOIEX or JICAX1) over
the past 1, 3, 5, and 10 years has been 17.60%, 9.39%, 8.92%, and 10.87%, respectively. This
means that the fund has had positive returns for each of these time periods. However, compared
to the benchmark index, the S&P 500 TR USD, the fund has underperformed in terms of annual
returns. The S&P 500 TR USD benchmark has had returns of 19.44%, 11.28%, 10.16%, and
11.97% over the same time periods.
This underperformance suggests that the actively managed fund has not been able to
outperform the overall market as measured by the benchmark index. The fund may have not been
able to generate as high returns due to a number of factors, such as higher expenses, lower
diversification, or a less successful investment strategy. Additionally, the fund may have also
experienced lower returns due to its focus on income-producing securities, which may not have
seen as much growth as other sectors in the market.
The above actively managed fund, MFS Blended Research Value Equity Fund Class A,
has shown a consistent outperformance against its benchmark, the S&P 500 TR USD2, over the
past 1, 3, 5, and 10 year periods. In the 1-year time frame, the fund has returned 21.89%,
outpacing the index's return of 19.44% by 2.45%. This could be attributed to the fund's active
management approach, where the fund managers have the flexibility to select stocks that they
believe are undervalued and have the potential for growth, thus leading to higher returns. Over
the 3-year and 5-year time frames, the actively managed fund has also outperformed the index by
0.78% and 0.56% respectively. This further demonstrates the success of the fund managers'
3
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investment strategy and their ability to generate alpha (excess returns) for investors. Even over
the long-term period of 10 years, the actively managed fund has outperformed the index by
0.33%. This suggests that the fund managers have been able to consistently identify undervalued
stocks and generate superior returns for investors over the past decade.
The return performance of the American Funds American Mutual Fund® Class F-1
(AMFFX) was lower than the S&P 500 TR USD2 benchmark in the 1 year, 3 year, and 5 year
time periods, but higher in the 10 year time period. This suggests that the fund may have
underperformed in the short term, but has shown better performance over a longer period of
time. This could be due to the investment strategy of the fund, which may focus on long-term
growth rather than short-term gains. Additionally, the fund is actively managed, which means
that a team of managers makes investment decisions and actively trades securities in an attempt
to outperform the market. This can result in higher fees and expenses for the fund, which may
contribute to its lower return performance compared to the index. However, it is worth noting
that the AMFFX fund still had positive returns in all time periods and showed stronger
performance in the 10 year period, indicating the potential benefits of active management over a
longer time horizon.
The Northern Income Equity Fund (NOIEX) underperformed its benchmark, the S&P
500 TR USD, in all time periods shown. This means that the fund was not able to achieve the
same level of return as the overall market represented by the index. However, it is worth noting
that the fund still posted positive returns in all time periods, indicating some level of success in
its investment strategy. In the one-year period, NOIEX returned 6.80% compared to the
benchmark's 19.44%. This underperformance can be attributed to market conditions, as the S&P
500 experienced a significant rally in this time period. However, over the longer-term periods of
4
three, five, and ten years, NOIEX still underperformed the benchmark, suggesting that the fund
may not have been able to keep up with the overall market performance. It is also worth noting
that NOIEX is an income fund, which means it may have a different investment strategy
compared to the overall market. Income funds typically focus on generating income for investors
through dividends, which may result in lower returns compared to growth-oriented funds.
Consistent Generation of Alpha by Chosen Funds
Out of the five funds chosen, only one consistently generated alpha, which is the MFS
Blended Research Value Equity Fund Class a (BRUDX). This means that the fund has
consistently outperformed its benchmark, the S&P 500 TR USD2, over the past 1, 3, 5, and 10
year time periods. This suggests that the fund managers have been able to select undervalued
stocks and generate positive returns for investors.
The other four funds, including Voya Large-Cap Growth Fund Class I (PLCIX), Northern
Income Equity Fund NOIEX (JICAX1), American Funds American Mutual Fund® Class F-1
(AMFFX), and Northern Income Equity Fund NOIEX (NOIEX1), have not consistently
generated alpha. While some funds may have outperformed their benchmark in certain time
periods, they have also underperformed in others. This suggests that the funds may have had
some successful periods, but could not consistently beat the market.
It is also worth noting that only one of the five funds, American Funds American Mutual
Fund® Class F-1 (AMFFX), showed consistent positive returns in all time periods analyzed. The
other four funds all had positive returns in the 1-year time frame, but experienced negative
5
returns in one or more of the longer-term time periods. This suggests that the returns of these
funds may be volatile and not consistently positive.
Pros and Cons of Active Management for an Equity Portfolio
Pros:
1. Potential for higher returns: The primary goal of active management is to outperform
the market, also known as generating alpha. This means that with successful stock selection and
market timing, actively managed funds have the potential to generate higher returns for
investors.
2. Flexibility in investment decisions: Actively managed funds have the flexibility to buy
and sell investments based on market trends and the fund manager's investment strategy. This
allows for more nimble decision-making and the ability to take advantage of market
opportunities.
3. Personalized approach: With active management, investors typically have access to a
team of professional fund managers who can provide personalized investment advice and
actively manage their portfolio according to their goals, risk tolerance, and time horizon.
Cons:
1. Higher fees and expenses: Actively managed funds typically charge higher fees and
expenses compared to passively managed funds. These fees can eat into investors' returns and
potentially limit the fund's overall performance.
6
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2. Increased risk: Because fund managers actively make investment decisions and may
take on higher-risk investments in pursuit of outperformance, actively managed funds can be
riskier than passively managed funds. This can result in higher returns, but also greater potential
losses.
3. No guarantee of performance: While active management aims to outperform the
market, there is no guarantee that fund managers will be successful in achieving this goal. In
fact, research has shown that the majority of actively managed funds underperform their
respective benchmarks over the long term.
4. Limited diversification: Some actively managed funds may have a concentrated
portfolio, meaning they hold a smaller number of stocks compared to passively managed funds.
This lack of diversification can increase the overall risk of the portfolio.
Pros and Cons of Passive Management for an Equity Portfolio
Pros:
1. Lower fees: Passive management typically involves investing in index funds or ETFs,
which have lower fees and expenses compared to actively managed funds. This means investors
can keep more of their returns.
2. Broad market exposure: Passive management involves investing in a broad index or
market, such as the S&P 500, which provides exposure to a wide range of companies. This can
help reduce risk and provide diversification for investors.
7
3. Consistent returns: Unlike actively managed funds, passive funds aim to replicate the
performance of their benchmark index. This means that investors can expect consistent returns,
without the risk of the fund underperforming.
4. Easy to understand: Index funds and ETFs are relatively straightforward investments,
making them easy for investors to understand and track. This can make passive management a
good option for beginner investors or those who prefer a hands-off approach.
Cons:
1. Lack of flexibility: Passive management means following the performance of a specific
benchmark, which limits the fund manager's ability to make changes based on market trends or
their own investment strategy.
2. Limited potential for outperformance: By design, passive funds aim to match the
performance of their benchmark index, so they do not have the potential to outperform the
market. This means that investors may miss out on opportunities for higher returns.
3. No personalized approach: Unlike actively managed funds, passive funds do not offer
personalized investment advice or strategy. They simply aim to replicate the performance of the
index they track.
4. Unable to avoid overvalued stocks: Passive funds hold all or a large number of stocks
in their chosen index, even if some of those stocks are overvalued. This means that investors are
exposed to the potential risks of overvalued stocks.
8
References
Tamplin, T. (2023). Active Management | Definition, Benefits, Drawbacks, Strategies. Finance
Strategists.
https://www.financestrategists.com/wealth-management/investment-
management/active-management/#:~:text=Active%20management%20has%20benefits%2C
%20such,the%20risk%20of%20human%20error.
Nason, D. (2016, December 13). Weighing the pros and cons of active portfolio management.
CNBC.
https://www.cnbc.com/2016/12/12/weighing-the-pros-and-cons-of-active-portfolio-
management.html
BRI Wealth Management. (2021, February 24). The pros and cons of active and passive
Investments - BRI Wealth Management. https://brigroup.co.uk/the-pros-and-cons-of-active-and-
passive-investments/
Snelling, D. (2020, November 3). Investment funds – 12 pros and cons of active and passive
funds
-
Charlton
House.
Charlton
House.
https://charltonhousewealthmanagement.hk/investment-funds-12-pros-and-cons-of-active-and-
passive-funds/
9
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Princip X
Princip X
Princip X
L Accorc X
* Sophia X
Premie X
UNIT
Princip X
https://strayer.sophia.org/spcc/principles-of-finance-practice-milestone-1-1/4
Question
Unit 1 Tutorials
6 If your
Consider the P/E ratios of the following companies:
Company A: 5.34
• Company B: 3.33
Company C: 7.90
Company D: 6.75
Company C is more
per unit of current net income than Company B.
O expensive
O economical
O volatile
O affordable
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f6
Quantitative Problem 1: You plan to deposit $2,200 per year for 6 years into a money market account with an annual return of 2%. You plan
to make your first deposit one year from today.
a. What amount will be in your account at the end of 6 years? Do not round intermediate calculations. Round your answer to the nearest cent.
4
b. Assume that your deposits will begin today. What amount will be in your account after 6 years? Do not round intermediate calculations.
Round your answer to the nearest cent.
6
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Review the FVAN definition and its equation.
Q Search
Understand the difference between an ordinary annuity and an annuity due.
Be careful about the order of mathematical operations if using the equation.
If using a financial calculator, be…
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D
5
=
B
D
D
▪
= Investment A
↓
A
▪
Investment A
Investment B
Investment C
3
9
Investment A
= Investment B
Investment C
Formulas
5 Formulas
B
C
Growth Rate
(Expected) Year 0
11% $3,000
6% $3,000
4% $3,000
Growth Rate
(Expected) Year 0
11% $3,000
D
Year 1
Growth Rate
(Expected) Year 0
11% $3,000
6% $3,000
4% $3,000
"Take each value in column C and multiply it by its adjacent growth rate in column B (which is 1 plus the percentage expected growth)."
ABSOLUTE CELL REFERENCES
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Year 1
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"Start in column D, then move across allowing the column to change, and multiply the preceding value by its FIXED growth rate in cell $B$13 (which is 1 plus the percentage expected growth) to get the current valu
FIXED COLUMN / RELATIVE ROW CELL REFERENCES
Year 3
Year 4
▼
▼
▼
Year 5
Year 6
#N/A
#N/A
#N/A
#N/A
Year 6…
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Given
Discount rate
14%
Year 5 multiple
5.00
Debt
$ 2,100,000
Year
Cash flows
1
$ 1,100,000
2
1,149,500
3
1,201,228
4
1,255,283
5
1,311,770
Solution
a. Enterprise Value
b. Equity Value
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D
5
=
B
D
D
▪
= Investment A
↓
A
.
Investment A
Investment B
Investment C
3
9
Investment A
= Investment B
Investment C
Formulas
6 Formulas
B
C
Growth Rate
(Expected) Year 0
11% $3,000
6% $3,000
4% $3,000
Growth Rate
(Expected) Year 0
11% $3,000
D
Year 1
Growth Rate
(Expected) Year 0
11% $3,000
6% $3,000
4% $3,000
"Take each value in column C and multiply it by its adjacent growth rate in column B (which is 1 plus the percentage expected growth)."
ABSOLUTE CELL REFERENCES
Year 5
Year 1
#N/A
Year 1
Formulas
▼
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#N/A
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Year 4
▼
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Year 6
#N/A
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#N/A
#N/A
Year 6…
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Prob. of state S&P 500
Technology T-Bills
-15%
State
International Fund
+ 1% GDP
.25
8%
5%
30%
+ 2% GDP
.50
12%
15%
15%
+ 3% GDP
.25
16%
45%
5%
0%
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PROJECT 8 QR Spring 2020 Finances - Word
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Pearson (Assignments) - MA
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3 103 Spring 2021
st: Test 2 (Finance) Online
nis Question: 1 pt
5 of 19 (1 complete) ▼
How much must be deposited today into the following account in order to have a $135,000 college fund in 11 years? Assume no additional deposits are made.
An account with quarterly compounding and an APR of 7.32%
Sshould be deposited today.
(Do not round until the final answer. Then round to the nearest cent as needed.)
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Princip X
Princip x
Princip X
, Accorc X
O Sophia X
* Premie X
. UNIT X
O icamp. X
"strayer.sophia.org/spcc/principles-of-finance-practice-milestone-1-1/5
3
4
5, 6
8
9
10
11
12 13
14 15
16 17 18
19 20 21 22 23 24
O This is a practice Milestone and does not count towards your score.
Question
Unit 1 Tutorials
A If you need help
Question 5
O Mark this question
What principle of corporate governance requires companies to operate in ways that respect the
social and legal relationships they have with employees and creditors, among others?
O Integrity and ethical behavior
O Disclosure and transparency
O Interests of other stakeholders
O Integrity and ethical behavior
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Question V
Full explain this question and text typing work only We should answer our question within 2 hours takes more time then we will reduce Rating Dont ignore this line. ..
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Sector
Basic Materials
Consumer Cyclicals
Financials
Real Estate
Communication Servic
FAKEX
Weight
Energy
Industrials
Technology
Consumer Defensive
Healthcare
Utilities
5.81%
13.45%
21.89%
6.98%
1.32%
Russell 2000 Portfolio Sector Russell 2000
Return Return Index Return
Index
4.32% 11.82%
7.84%
7.84%
4.63%
9.98% 9.48% 11.71%
32.36% 8.91% 4.29%
10.42% 2.33% 1.20%
7.84%
0.67% -27.89% -24.51%
5.87% -12.43% -16.44%
12.67% 14.32% 17.00%
10.35% 16.34% 10.74%
2.81% 5.63% -0.91%
4.27% 10.43% 26.63%
5.97% 7.35% 13.85%
6.43%
17.43%
4.53%
11.78%
6.15%
4.23%
100.00%
Consider the Interaction Effect using only the Technology Sector in the data presented above. Which statement below are true? (Select all that apply)
7.84%
7.84%
7.84%
7.84%
7.84%
7.84%
7.84%
7.84%
The Interaction Effect for the Technology Sector was negative
✔ The Interaction Effect for the Technology Sector was positive
O Under-weighting the Technology Sector was a good idea since the Sector was beaten by many other sectors…
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- task 1 question 4arrow_forwardPrincip X Princip X Princip X L Accorc X * Sophia X Premie X UNIT Princip X https://strayer.sophia.org/spcc/principles-of-finance-practice-milestone-1-1/4 Question Unit 1 Tutorials 6 If your Consider the P/E ratios of the following companies: Company A: 5.34 • Company B: 3.33 Company C: 7.90 Company D: 6.75 Company C is more per unit of current net income than Company B. O expensive O economical O volatile O affordable SAVE AND CONTINUE "pe here to searcharrow_forwardM4arrow_forward
- Learning SE MINDTAP evo/index.html?deploymentid=60338517901669990751687760&elSBN=9780357517642&nbld=3626933&snap... ☆ lomework 6300. 1 mancial Lailuialvi vi a spicoubnicel. Hide Feedback Correct X f6 Quantitative Problem 1: You plan to deposit $2,200 per year for 6 years into a money market account with an annual return of 2%. You plan to make your first deposit one year from today. a. What amount will be in your account at the end of 6 years? Do not round intermediate calculations. Round your answer to the nearest cent. 4 b. Assume that your deposits will begin today. What amount will be in your account after 6 years? Do not round intermediate calculations. Round your answer to the nearest cent. 6 Hide Feedback Incorrect F Check My Work Feedback Review the FVAN definition and its equation. Q Search Understand the difference between an ordinary annuity and an annuity due. Be careful about the order of mathematical operations if using the equation. If using a financial calculator, be…arrow_forwardD 5 = B D D ▪ = Investment A ↓ A ▪ Investment A Investment B Investment C 3 9 Investment A = Investment B Investment C Formulas 5 Formulas B C Growth Rate (Expected) Year 0 11% $3,000 6% $3,000 4% $3,000 Growth Rate (Expected) Year 0 11% $3,000 D Year 1 Growth Rate (Expected) Year 0 11% $3,000 6% $3,000 4% $3,000 "Take each value in column C and multiply it by its adjacent growth rate in column B (which is 1 plus the percentage expected growth)." ABSOLUTE CELL REFERENCES Year 5 Year 1 #N/A Year 1 Formulas ▼ #N/A #N/A #N/A E #N/A #N/A #N/A ▼ ▼ Year 2 #N/A F Year 2 #N/A #N/A #N/A Year 3 #N/A G H RELATIVE CELL REFERENCES #N/A #N/A #N/A Year 4 ▼ ▼ ▼ #N/A ▼ #N/A #N/A #N/A #N/A "Start in column D, then move across allowing the column to change, and multiply the preceding value by its FIXED growth rate in cell $B$13 (which is 1 plus the percentage expected growth) to get the current valu FIXED COLUMN / RELATIVE ROW CELL REFERENCES Year 3 Year 4 ▼ ▼ ▼ Year 5 Year 6 #N/A #N/A #N/A #N/A Year 6…arrow_forwardGiven Discount rate 14% Year 5 multiple 5.00 Debt $ 2,100,000 Year Cash flows 1 $ 1,100,000 2 1,149,500 3 1,201,228 4 1,255,283 5 1,311,770 Solution a. Enterprise Value b. Equity Valuearrow_forward
- D 5 = B D D ▪ = Investment A ↓ A . Investment A Investment B Investment C 3 9 Investment A = Investment B Investment C Formulas 6 Formulas B C Growth Rate (Expected) Year 0 11% $3,000 6% $3,000 4% $3,000 Growth Rate (Expected) Year 0 11% $3,000 D Year 1 Growth Rate (Expected) Year 0 11% $3,000 6% $3,000 4% $3,000 "Take each value in column C and multiply it by its adjacent growth rate in column B (which is 1 plus the percentage expected growth)." ABSOLUTE CELL REFERENCES Year 5 Year 1 #N/A Year 1 Formulas ▼ #N/A #N/A #N/A E #N/A #N/A #N/A ▼ ▼ Year 2 #N/A F Year 2 #N/A #N/A #N/A Year 3 #N/A H RELATIVE CELL REFERENCES G #N/A #N/A #N/A ▼ ▼ ▼ Year 4 #N/A ▼ #N/A #N/A #N/A #N/A "Start in column D, then move across allowing the column to change, and multiply the preceding value by its FIXED growth rate in cell $B$13 (which is 1 plus the percentage expected growth) to get the current valu FIXED COLUMN / RELATIVE ROW CELL REFERENCES Year 3 Year 4 ▼ ▼ ▼ Year 5 Year 6 #N/A #N/A #N/A #N/A Year 6…arrow_forwardProb. of state S&P 500 Technology T-Bills -15% State International Fund + 1% GDP .25 8% 5% 30% + 2% GDP .50 12% 15% 15% + 3% GDP .25 16% 45% 5% 0%arrow_forwardPROJECT 8 QR Spring 2020 Finances - Word A jrush416 erences Mailings Review View Help Tell me what you want to do A Aa - 三 T AaBbCcDc AaBbCcDc AaBbC AAB6CCE TNormal T No Spac. Heading 1 Heading 2 Paragraph Styles 5. Suppose you want to have $900,000 forretirement in 30 years. Your account earns 8% interest. a) How much would you needto deposit in the account each month b) How much interest will you earn?arrow_forward
- Integrated Excel Problem 9-7 Portfolio Return Year-to-date, Oracle had earned a -1.34 percent return. During the same time period, Valero Energy earned 7.96 percent and McDonald's earned 0.88 percent. If you have a portfolio made up of 30 percent Oracle, 25 percent Valero Energy, and 45 percent McDonald's, what is your portfolio return? Navigation:arrow_forwardSuper confusedarrow_forwardCH. 3 #9 Recompute the net present values using (a) a cost of money of 0.20 and (b) a cost of money of 0.05 for each of the investments of problem 8.arrow_forward
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