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

2. 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

3. 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

4. Investment Cash Flow Timeline 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 $2,500 / yr ($125,000) / yr $5,000

5. 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

6. Equity Funds Suggested FundR-SquaredBetaAlpha Sharpe Ratio Weight Fidelity Leveraged 631.3330.382.0750% Fidelity Real Estate 11.3719.061.5425% Fidelity Low Priced Stock 78.937.881.3225%

7. Bond Funds Suggested FundR-SquaredBetaAlpha Sharpe Ratio Weight Fidelity Gov’t Income 971.17-1.51.49100%

8. Portfolio Quarterly Returns Total Returns FLVCXFRESXFLPSXWeighted equity return q1'01-1.59-2.243.94-0.37 q2'019.0811.0212.910.52 q3'01-21.18-2.47-7.3-13.03 q4'01223.4516.4815.98 q1'02-1.967.546.972.65 q2'02-18.546.08-0.27-7.82 q3'02-3.44-8.8-16.98-8.17 q4'0227.391.665.9315.59 q1'034.41.49-6.041.06 q2'0344.069.9421.3129.84 q3'036.639.858.57.90 q4'0322.419.1513.8816.96 q1'045.4812.155.867.24 q2'042.5-5.381.240.22 q3'04-0.578.470.21.88 q4'0415.7616.5613.8315.48 q1'054.67-5.53-0.970.71 q2'051.7312.643.114.80 Average6.604.754.595.64 Total ReturnsFGOVX q1'012.17 q2'010.05 q3'015.17 q4'01-0.74 q1'02-0.35 q2'024.27 q3'026.23 q4'020.5 q1'030.81 q2'032.29 q3'03-0.71 q4'03-0.16 q1'042.8 q2'04-2.76 q3'042.86 q4'040.76 q1'05-0.33 q2'052.87 Average1.43

9. Efficient Frontier Portfolio 1 Portfolio 2 Portfolio 3 Portfolio 4

10. Equity to Bond Weights  Years 0-10 90% equity, 10% bonds 90% equity, 10% bonds  Years 11-15 80% equity, 20% bonds 80% equity, 20% bonds  Years 16-17 70% equity, 30% bonds 70% equity, 30% bonds  Years 18-21 60% equity, 40% bonds 60% equity, 40% bonds

11. Investment Schedule Year90/1080/2070/3060/40 05,000.00 18,543.16 212,825.55 318,001.38 424,257.05 531,817.87 640,956.12 752,000.91 865,350.01 981,484.16 10100,984.43 11124,553.09 12 150,942.93 13 182,394.45 14 219,878.52 15 264,552.19 16 317,794.48 17 375,900.92 18 316,674.60 19 241,755.98 20 154,989.16 21 54,500.35

12. 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 q1'01-0.12-10.48 q2'019.475.46 q3'01-11.21-12.93 q4'0114.319.51 q1'022.350.19 q2'02-6.61-11.65 q3'02-6.73-14.89 q4'0214.087.63 q1'031.04-2.79 q2'0327.0914.08 q3'037.042.26 q4'0315.2510.91 q1'046.801.79 q2'04-0.081.25 q3'041.98-1.42 q4'0414.018.37 q1'050.61-1.97 q2'054.611.51 Average5.220.38

13. Portfolio Return on Index Return

14. 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

15. DO YOU HAVE ANY QUESTIONS?