The paper "Deciding on the Equity Investment" is a worthy example of an assignment on finance and accounting. Answer 1The major proportion of the investments related to the mutual funds comes from institutional investors including foreign institutional investors, banks and corporations. Apart from the equity schemes of the investors, the highest participation is made by institutional investors. However, retail participation is more towards equity. From the graphical representation of the mutual fund investors, it can be inferred that at the initial stage in 1986 the performance of actively managed equity funds was better than Vanguard 500 Index which took a major dip in 1998.
At this point in time, the performance of the Vanguard 500 Index Fund performance tends to be better. Again within a span of 7-8 years, the actively managed equity performance kept Vanguard 500 Index Fund way behind. Thus it can be said that the performance of actively managed stocks has been portraying better rates of return over the years than that of the Vanguard 500 Index Fund. Answer 2The efficient market hypothesis of any company is difficult to test.
The consistency of the company can be judged on the basis of the three forms of efficiency, i.e. , strong, semi-strong and weak. The strong form of efficiency hypothesis results in fewer evidence of inconsistency. However, the intense of inconsistency grows with semi-strong to a weak form of efficiency hypothesis. From the graphical representation, it can be assessed that inconsistency prevails over the year. Since the company has not been successful in projecting a similar kind of return over the year. But depending on the area where the company has shown a strong form of efficiency hypothesis there the extent of consistency prevails.
Thus overall both the elements of consistency and inconsistency are observed based on the performance of the company (Jensen, 1978, pp. 1-5). Answer 3The best way of deciding on the equity investment of the 401(k) plans relates to the assets of the company. Initially, the company should work towards the contribution plan resulting in paying more emphasis on the asset allocation responsibility of the company. The increase in the defined contribution plan of the company would take care of the supplemental coverage.
The asset allocation pattern of the company helps in the estimation of taking investment decisions. However, the pattern of investment is highly depended on factors like the age and income of the person; as to the investor is willing to concentrate on an equity-based portfolio or is keener on the debt-based portfolio. Since the investor here is having equity of around 70%, hence the investment decision has to be taken very tactfully depending upon the companies where the investments have been made. The debt-equity ratio of the comp-any is an important element in assessing the company's efficiency and depending on which the decision should be taken.
The investment should be made in various sectors so that the stocks of the company are negatively correlated thus yielding higher returns for the portfolio (Uccello, 2000, p. 1-6).