MUTUAL FUNDS PORTFOLIO PROJECT 1 REPORT Case Solution

Analysis & Discussion of Results of Portfolios

            The arithmetic returns, geometric mean returns and the standard deviation of each of the four stock mutual funds and the bond fund have been calculated. The variance/covariance and the correlation matrices have also been generated for each of the four mutual funds and the bond fund which is the risk free asset(Hatemi, 2014).

            If we compare the mean returns of all the four mutual funds and also the T-bond fund, then we can see that the highest mean return is generated by the large cap mutual fund which is VPCCX and the variability in the returns of this mutual fund is also lower as compared to the small cap and the international mutual fund. The lowest variability is shown by the T-bond fund, which is 0.03% and the variance is 0% which shows that this fund is a risk free fund.

            Similarly, if we compare the geometric mean returns of each of the four funds and the t-bond fund, then we can see that the small cap fund and the internationals stock fund have the higher returns as compared to the large cap fund however, their standard deviations or the level of risk inherent in these mutual funds is also high. Geometric returns are more preferable as compared to the mean returns, thus we can conclude that the small cap fund and the international stock funds are the best mutual funds.

The arithmetic average return is used to compute the average return over the five-year period. If the returns in any specific year are not good, then the returns of the next year would not be affected by it. This indicates, in this case, each of the returns is treated independently. However, when we are assessing the returns on an investment, then we need to follow the reality that the numbers are not independent of each other, and this is the reason that returns are multiplied in the geometric average return formula, and it makes the geometric mean return more accurate(Mitchell, 2004).

Discussion of correlations

            The correlations matrix has also been generated for each of the four mutual funds and the t-bond fund. We can see that the correlation between the large cap and the small cap fund is 80.59%, which is highly positive. The correlation between the international fund and the large cap fund is also high with a value of 84.44%. These are shown in the appendix.The small cap stocks are often expensive as compared to the large cap stocks or mutual funds. However, the risks in the large cap fund are much higher as compared the small cap funds(Székely, 2007).

The high correlation between the international fund and the large cap mutual fund might be due to the fact that both are growth funds and invest in the same sectors especially the technology sector. Similarly, the high correlation between the small cap and the large cap mutual fund might be due to the fact that both of these funds make a significant portion of their fund investment in the US stocks.

Finally, the low correlation of the small cap and large cap with the t-bond fund and the negative correlation of the international fund and corporate bond fund with the t-bond are due to the fact that the first class of the funds is risky while the t-bond is considered as the riskless asset fund with 0% variability in its returns. This is the reason that the international fund and the corporate bond fund have negative correlations with the t-bond fund……………………

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