Comparisons of Returns Between Randomly Chosen Portfolios from Indexes and Returns of Best Performing Equity Funds; Determining Whether Investors Should Pay Management Fees to Equity Funds’ Managers

2014 dissertation for MSc in Finance and Risk. Selected by academic staff as a good example of a masters level dissertation. In the extremely unpredictable stock market, especially in the period following the financial crisis, it has become very common that investors are willing to pay fund managers to make investment decisions for them and to build certain portfolios that will bring investors best possible returns. On the other hand, investors have options of building their own portfolios or investing in some existing indexes and getting the benchmark return. This paper examines and evaluates the possible returns of randomly chosen portfolios from different countries’ indexes and compares them with the best equity funds’ returns and with the benchmark return. In other words, this paper is answering the question: Should investors pay the fund managers’ fee to make investments for them? Is this management fee going to bring them enough of extra profit so that it will pay off? Key steps in these evaluations and comparisons will include gathering data for most popular Indexes’ returns of two different countries including United Kingdom and United States of America. This information will be used in building the random portfolios by using Monte Carlo Simulation method. Final results will show the mean as well as the minimum return and they will be compared with returns of best equity funds from these countries