Identify the type of error Connell is at risk of committing and its associated cost for each
Question:
Identify the type of error Connell is at risk of committing and its associated cost for each alternative. Justify your selection.
Connell asks the adviser about the conditions under which any form of style analysis would be useful for understanding the funds he is considering.
Connell elects to defer fund selection and places his inheritance in a short-term money market account. A year later, Connell reviews the one-year performance results of the three funds compared to the benchmark, as shown in Exhibit 2.
Connell believes he now has two main alternatives for fund investment:
• Alternative 1: Keep his inheritance in the money market account to avoid the Eta fund.
• Alternative 2: Place his inheritance in the Theta fund.
John Connell inherited $700,000 at the beginning of the year and has been developing related investment goals and policies with a financial adviser. The adviser has identified three
potential investment funds for consideration. All three have earned similar returns over the last five years and are expected to earn similar returns going forward. Publishing their investment results on a timely and routine basis, they include the following asset classes:
• US equities • Global equities • Venture capital • Corporate bonds • Government bonds • Cash reserves Exhibit 1 presents information about the funds.
Step by Step Answer:
Based on the scenario provided Connell is at risk of committing the error of hindsight bias particularly if he evaluates the performance of the funds ...View the full answer
