Applied Analysis – Mutual Funds and Portfolio Building

Mr. and Mrs. Grubman have \$10,000 in cash they received for their wedding.  They would like to invest this amount long-term for their eventual retirement in 30 years.  After an in-depth analysis of their situation, you determine that 10% should be placed in a money-market/short-term bond fund for emergencies, 50% should be place in a diversified stock fund, 20% in a intermediate/long-term bond fund, 10% in an international stock fund, and 10% in a REIT fund.

1.  If your last name starts A-M, you've decided to use just Fidelity funds.  Go to the Fidelity site http://www.fidelity.com/.  If your last name starts with N-Z, you’ve decided to use just Vanguard funds, http://www.vanguard.com/ .  Find five funds that meet the conditions in the intro.  Give me the names of the funds you choose and their expense ratios.  Ignore minimum amounts needed for purchases although this would be an issue in reality.

2.  Examine the ten year historical returns for the five funds you chose in task one.  (Use five or three year historical returns if ten year returns are not available.)  To find historical return results, simply click on the fund you chose from your screening list.  Assuming historical returns are at least a proxy for expected returns, determine the weighted average expected return for this portfolio.  If your historical returns are negative, approximate what you would expect to make from each fund rather than use negative numbers since no one expects to lose money.  If your fund's return is extremely high, reduce the amount to what you think is more likely to occur in the future.  Remember, we only look at historical results to give us an idea of what to expect in the future.  It should be used as a guide only.  To calculate your weighted average return, use the following formula: Weighted average expected return = .1(expected money market fund return) + .5(expected stock fund return) + .2(expected intermediate bond fund return) + .1(expected international fund return) + .1(expected Reit fund return).

3.  Based on your answer in task two, how much should the Grubmans expect to have 30 years from now?

4.  Assume a standard deviation of 10% for your portfolio.  What is the best and worse possible outcome 30 years from now based on the lower and upper bounds of a 90% confidence interval?  Don’t forget to change the confidence interval on the spreadsheet.  You need to go to the risk and return spreadsheet for this question or click Risk and Return Spreadsheet

5.  Based on the risk and return spreadsheet, at what year is the lower bound above the \$10,000 initial investment?

6.  Assume now that the Grubmans add \$3,000 each year to their retirement fund.  How much should the Grubmans expect to have 30 years from now?  What is the best and worse possible outcome 30 years from now based on the lower and upper bounds of a 90% confidence interval?  You again need to go to the risk and return spreadsheet for this question.

7.  Now go to http://screen.morningstar.com/screener_etf/etf_screener_version1.aspx or http://www.etfconnect.com/ (Click find a fund button).

Find five ETF funds that meet the conditions in the intro.  Give me the name of these funds, their expense ratios, and historical return.  How do the expense ratios between your mutual funds and the ETFs compare?  How would you rather invest your money, ETF’s or mutual funds and why?

8.  Now go to http://www.etfconnect.com/ and find 5 closed end funds that meet the conditions in the intro.  Give me the name of these funds, their expense ratios, historical return, and the premium or discount that goes along with each of them.

9.  How do the expense ratios between your open ended mutual funds, the ETFs, and the closed-end funds compare?  How would you rather invest your money, open-ended mutual funds, closed-end mutual funds, or ETF’s and why?

Your assignment should be typed and STAPLED.  Below is an example of what I would like to see for a couple of the questions, but please note the questions were different.  This is to give you an ideal of the form, not the content.

Name

Mutual Funds/Portfolio Building

Principles of Investments

Dr. Trainor

February 6, 2007

Vanguard Mutual Funds

VS.

Fidelity Mutual Funds

 1) Fidelity Mutual Funds Name of Mutual Funds Expense Ratio 10 Year  Return Money Market Xxx 0.13% 3.67% Diversified Stock Fund Xxx 0.15% 7.93% REIT Fund Xxx 0.21% 15.10% International Stock Fund Xxx 0.27% 10.72% Bond Fund Xxx 0.18% 7.72%

2)

Weighted Average Expected Return:

.1(3.67) + .5(7.93) + .2(7.72) + .1(10.72) + .1(15.10) = 8.4580%

Write explanation if using returns different from historical average and why?  One or two sentences is plenty for each difference.

3)

Time-Value of Money:

N=30

I/Y=8.4580

PV=10,000

PMT=0

FV=\$114,247.77

4)

Standard Deviation: 10%

Best in 30 Years: \$270,181.28

Worst in 30 Years: \$37,475.48

Upper Limit Annual Return: 11.6%

Lower Limit Annual Return: 4.5%

5)

Lower bound above \$10,000 initial investment:

Year 6

Upper Limit: \$24,681.66

Lower Limit: \$10,202.49

6)

30 Years from now + \$3,000 Annual Payment:

Expected:  XXXXX

Best: \$1,023,568.15

Worst: \$196,566.93

Upper Limit Annual Return: 12.0%

Lower Limit Annual Return: 3.9%

Thanks to E. Choate for permission to use assignment as example.