The Magellan mutual fund has beaten the Standard andPoor’s 500 during 11 of the last 13 years. People use this asan argument that you can “beat the market.” Here’s anotherway to look at it that shows that Magellan’s beating themarket 11 out of 13 times is not unusual. Consider 50 mutualfunds, each of which has a 50% chance of beating the marketduring a given year. Use simulation to estimate theprobability that over a 13-year period the “best” of the 50mutual funds will beat the market for at least 11 out of 13years. This probability turns out to exceed 40%, whichmeans that the best mutual fund’s beating the market 11 outof 13 years is not an unusual occurrence!
The Magellan mutual fund has beaten the Standard andPoor’s 500 during 11 of the last 13 years. People use this asan argument that you can “beat the market.” Here’s anotherway to look at it that shows that Magellan’s beating themarket 11 out of 13 times is not unusual. Consider 50 mutualfunds, each of which has a 50% chance of beating the marketduring a given year. Use simulation to estimate theprobability that over a 13-year period the “best” of the 50mutual funds will beat the market for at least 11 out of 13years. This probability turns out to exceed 40%, whichmeans that the best mutual fund’s beating the market 11 outof 13 years is not an unusual occurrence!
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