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Team Payroll Versus Performance in Professional Sports: Is Increased Spending Associated with Greater Success?

By Grant Shorin

Professional sports are a billion-dollar industry, with player salaries accounting for the largest expenditure. Comparing results between the four major North American leagues (MLB, NBA, NHL, and NFL) and examining data from 1995 through 2015, this paper seeks to answer the following question: do teams that have higher payrolls achieve greater success, as measured by their regular season, postseason, and financial performance? Multiple data visualizations highlight unique relationships across the three dimensions and between each sport, while subsequent empirical analysis supports these findings. After standardizing payroll values and using a fixed effects model to control for team-specific factors, this paper finds that higher payroll spending is associated with an increase in regular season winning percentage in all sports (but is less meaningful in the NFL), a substantial rise in the likelihood of winning the championship in the NBA and NHL, and a lower operating income in all sports.

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Advisor: Peter Arcidiacono | JEL Codes: Z2, Z20, Z23, J3

Vanguard’s Index Funds vs. Vanguard’s Managed Funds: a Nine Style Box and Fama-French Multi-Variable Regression Approach

By Susheel Nalla

Many investors struggle to determine whether they want to invest in managed funds or indexed funds when they build portfolio. Vanguard, founded by John Bogle, a strong advocate for indexed investing has seen his company grow to over $3.9 trillion in funds. In the last three years $1 trillion of new money has come into their passive funds as investors are moving towards saving on cheaper expense ratios. However, many people like Vanguard’s former CIO Gus Sauter believe that managed funds can deliver additional value to their investors by keeping expense ratios low and hiring the world’s best managers. This study looks at Vanguard indexed and managed funds in three different market capitalizations organized nine style boxes to see whether Vanguard’s strategy of low management expense ratios provides additional value to their own benchmarks. This study uses two comparison methods to analyze market returns of these funds from 2006-2016. First, indexed and managed Vanguard funds will be compared using a Morningstar nine-style box to directly see differences in return rates and estimate riskiness of these assets through standard deviations. Second, the Fama-French three-factor model will be used to create a regression explaining where the fund returns may be coming from. This method will determine the SMB and HML of the funds telling us the size of the equities in the fund along with their value premium over book value. Also, a market coefficient will be determined to see how close these funds are relative to a market benchmark. Overall, it is determined that Vanguard indexed funds in small-cap and mid-caps are slightly better investments based on returns and exposure to risk along with their equity composition. Based on the same criteria, large-cap funds perform slightly better than their indexed counterparts.

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Advisor: Edward Tower | JEL Codes: C55, G10, G11, G12

Are Asset Allocation Funds Good at Market Timing?

By Yunze Chen

“Don’t forget that your incredible success in consistently making each move at the right time in the
market is but my pathetic failure in making each move at the wrong time. … … I don’t know anyone who can do it successfully, nor anyone who has done so in the past. Heck, I don’t even know anyone who knows anyone who has timed the market with consistent, successful, replicable results.” (John Bogle, quoted in The Finance Buff, 2011).

John C. Bogle, the founder of the Vanguard Group, has long insisted on the superiority of index funds over actively managed mutual funds and the foolishness of attempts to time the market. He published two articles in the Journal of Portfolio Management showing that in eight out of nine style categories, managed mutual funds had lower risk-adjusted returns than the corresponding indexes did. While this demonstrates the failure of stock picking by mutual funds to serve investors well, it says nothing about their ability to time the market by changing styles. Managers of asset allocation funds often use a flexible combination of stocks, bonds, and cash; some, but not all, shift assets frequently based on analysis of business-cycle trends. To test his view of market timing, we evaluated the returns of 82 major asset allocation funds by comparing them with the returns of corresponding baskets of Vanguard’s index funds over a 13-year time span. We find that on average the index funds have higher risk-adjusted returns. We conclude that “simplicity is the ultimate sophistication” applies to mutual fund investments.

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Advisor: Edward Tower | JEL Codes: G10, G11, G20 | Tagged: Expense Ratio, Mutual fund families, Performance


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