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Funds 202: Benchmarks for Funds

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1.
Imagine that you have calculated that you need a mutual fund that returns 7% per year for the next 35 years to fund your retirement. What would be a reason NOT to instead choose a fund that returned 8, 9, or even 10% so that you could save extra?
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There would be a greater risk of loss. The return is greater because the risk is greater. You would be risking your ability to retire in 35 years if you chose the fund with the higher annual return.
2.
In the world of mutual funds, peer groups are funds that buy the same types of securities that your fund buys.
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True. Their value is that they give you a way to examine your fund's performance.
3.
Which is the best index with which to compare a small-company fund's performance?
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The Russell 2000 Index. The SP 500 includes mostly large-company stocks, and the Bloomberg US Aggregate Bond Index follows bonds. Neither is an appropriate benchmark for small-company funds.
4.
Fund X underperformed the SP 500 by five percentage points per year during the past five years, after beating the index by just as much in the three previous years. Fund X _______.
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Probably owns something other than large-company stocks. In this case, the SP 500 is probably a bad benchmark for this fund. It likely owns something other than large-company stocks. To put its performance into better context, check its record relative to its Morningstar category peers.
5.
In regard to mutual fund benchmarks, what are peer groups?
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Funds that buy the same types of securities. You should compare funds to others in the same peer group.