You have excess cash from your year-end bonus and want to invest in the US equity market. You have the option of investing in 1, 2, 3, 4 or all of the investments options listed below. Develop a rational for an investment strategy. Bring into the discuss such concepts as the Efficient Market Hypothesis, random walk, abnormal returns, market anomalies, behavioral bias, risk factors, factor exposures, liquidity issues etc. Bring as many investment concepts into your rational for constructing a portfolio. Consider the four US equity mutual funds. The first three are large capitalization focused funds, the fourth is a small capitalization fund, and the fifth is the S&P 500 index (ETF) portfolio that perfectly tracks the benchmark. Each fund has an expense ratio of .75%; the benchmark (S&P 500) can be purchase for .05%. The following returns are net of fees.
1 year return Last 3 year return last 5 year return last 10 year return
Fund 1: 14.8 8.5 13.8 7.4
Fund 2: 10.8 7.7 15.1 8.5
Fund3: 14.3 8.1 14.7 6.9
Fund 4: 18.3 5.1 9.2 9.8
S&P 500 12.0 8.9 14.7 7.0