INVESTING FOR A COLLEGE EDUCATION Perry Grossman Daphne Harris Radhames Nova Investments: FE823 Professor James L. Grant August 23, 2005

Your Investment Objectives  Invest now for your newborn’s college education in 18 years  Save enough money to fund an Ivy League college, preferably Yale  Make yearly deposit of $2,500 into portfolio and not worry about following stock performance  Invest aggressively initially to get highest return

Cost of Yale in 2023  Cost of Yale in 2005: $38,850  6% yearly rate of increase of college education  Cost of one year in 2023: $107,711  Cost of four years: $471,194  Other expenses: $28,806  Total investment needed: $500,000

Investment Cash Flow Timeline $2,500 / yr ($125,000) / yr $5,000

Investment Strategy  Low maintenance investment Mutual funds over stocks Mutual funds over stocks Diversified between equity and bond funds Diversified between equity and bond funds  Higher returns early in investment 90/10 equity to bond ratio first 10 years 90/10 equity to bond ratio first 10 years  Lower risk later in investment 60/40 equity to bond ration once child enters college 60/40 equity to bond ration once child enters college

Equity Funds Suggested FundR-SquaredBetaAlpha Sharpe Ratio Weight Fidelity Leveraged % Fidelity Real Estate % Fidelity Low Priced Stock %

Bond Funds Suggested FundR-SquaredBetaAlpha Sharpe Ratio Weight Fidelity Gov’t Income %

Portfolio Quarterly Returns Total Returns FLVCXFRESXFLPSXWeighted equity return q1' q2' q3' q4' q1' q2' q3' q4' q1' q2' q3' q4' q1' q2' q3' q4' q1' q2' Average Total ReturnsFGOVX q1' q2' q3' q4' q1' q2' q3' q4'020.5 q1' q2' q3' q4' q1'042.8 q2' q3' q4' q1' q2' Average1.43

Efficient Frontier Portfolio 1 Portfolio 2 Portfolio 3 Portfolio 4

Equity to Bond Weights  Years % equity, 10% bonds 90% equity, 10% bonds  Years % equity, 20% bonds 80% equity, 20% bonds  Years % equity, 30% bonds 70% equity, 30% bonds  Years % equity, 40% bonds 60% equity, 40% bonds

Investment Schedule Year90/1080/2070/3060/40 05, , , , , , , , , , , , , , , , , , , , , ,500.35

Returns & Risk Versus Indices Regression analysis on 90/10 portfolio to the Index yields: R-squared of 88 percent Alpha of 4.82 Beta of 1.04 Total ReturnsWeighted Portfolio ReturnWeighted Index Return q1' q2' q3' q4' q1' q2' q3' q4' q1' q2' q3' q4' q1' q2' q3' q4' q1' q2' Average

Portfolio Return on Index Return

Conclusions  Investment strategy comfortably will fund your child’s Yale education in 2023  Portfolio will yield returns higher than index funds and will require little effort  Risk is moderate and will be reduced over the life of the portfolio

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