Mutual Funds an Analysis of Case Study

Excerpt from Case Study :

The correlation was expected to be relatively weak because even high value funds can experience exceptional performance.

The weakest correlation (0.056), which is not a significant correlation at all, is with the Morningstar rating. This is somewhat surprising, because the Morningstar rating presumably takes the fund's historical returns into consideration. However, in any given year the fund may or may not perform according to its track record. This could result in a divergence between the Morningstar rating and total returns.

There are also correlations noted between the type and the NAV and the type and the expense ratio. It should be expected that the latter would hold, because the cost of managing a fund is dependent on the cost of analyzing and trading the securities the fund. It would be expected, for example, that an international equity fund would cost more to manage than a fixed income fund.

What this analysis shows is that although Russell does not yet know what the Morningstar rating of the fund will be, that rating is not relevant to the other decisions regarding the fund. Morningstar is an external organization, which accounts for the low correlation between its ratings and the internal characteristics of the funds. The return of the fund is more closely related to the type of fund, and with a lesser relationship to the expense ratio. The expense ratio itself is related to the type of fund. These are the factors that are the most significant in driving fund value, and…

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