Hot mutual funds? Investment advertisements always warn that pastperformance does not

Chapter 0, Problem 7.10

(choose chapter or problem)

Hot mutual funds? Investment advertisements always warn that pastperformance does not guarantee future results. Here is an example that showswhy you should pay attention to this warning. The table below gives the percentreturns from 23 Fidelity Investments sector funds in 2002 (a down year forstocks) and 2003 (an up year). Sector funds invest in narrow segments of thestock market. They often rise and fall faster than the market as a whole.2002 2003 2002 2003 2002 2003return return return return return return17.1 23.9 0.7 36.9 37.8 59.46.7 14.1 5.6 27.5 11.5 22.921.1 41.8 26.9 26.1 0.7 36.912.8 43.9 42.0 62.7 64.3 32.118.9 31.1 47.8 68.1 9.6 28.77.7 32.3 50.5 71.9 11.7 29.517.2 36.5 49.5 57.0 2.3 19.111.4 30.6 23.4 35.0(a) Make a scatterplot of 2003 return (response) against 2002 return(explanatory). The funds with the best performance in 2002 tend to have theworst performance in 2003. Fidelity Gold Fund, the only fund with a positivereturn in both years, is an extreme outlier.(b) To demonstrate that correlation is not resistant, find r for all 23 funds andthen find r for the 22 funds other than Gold. Explain from Golds position inyour plot why omitting this point makes r more negative.