INVESTING FOR A COLLEGE EDUCATION

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INVESTING FOR A COLLEGE EDUCATION
Investments FE823Professor James L.
GrantAugust 23, 2005

• Perry GrossmanDaphne Harris
• Radhames Nova

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Your Investment Objectives

• Invest now for your newborns 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

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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

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Investment Cash Flow Timeline
2,500 /
yr
5,000

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

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

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Equity Funds Suggested
Fund R-Squared Beta Alpha Sharpe Ratio Weight
Fidelity Leveraged 63 1.33 30.38 2.07 50
Fidelity Real Estate 11 .37 19.06 1.54 25
Fidelity Low Priced Stock 78 .93 7.88 1.32 25
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Bond Funds Suggested
Fund R-Squared Beta Alpha Sharpe Ratio Weight
Fidelity Govt Income 97 1.17 -1.51 .49 100
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Portfolio Quarterly Returns
Total Returns FLVCX FRESX FLPSX Weighted equity return
q1'01 -1.59 -2.24 3.94 -0.37
q2'01 9.08 11.02 12.9 10.52
q3'01 -21.18 -2.47 -7.3 -13.03
q4'01 22 3.45 16.48 15.98
q1'02 -1.96 7.54 6.97 2.65
q2'02 -18.54 6.08 -0.27 -7.82
q3'02 -3.44 -8.8 -16.98 -8.17
q4'02 27.39 1.66 5.93 15.59
q1'03 4.4 1.49 -6.04 1.06
q2'03 44.06 9.94 21.31 29.84
q3'03 6.63 9.85 8.5 7.90
q4'03 22.41 9.15 13.88 16.96
q1'04 5.48 12.15 5.86 7.24
q2'04 2.5 -5.38 1.24 0.22
q3'04 -0.57 8.47 0.2 1.88
q4'04 15.76 16.56 13.83 15.48
q1'05 4.67 -5.53 -0.97 0.71
q2'05 1.73 12.64 3.11 4.80
Average 6.60 4.75 4.59 5.64
Total Returns FGOVX
q1'01 2.17
q2'01 0.05
q3'01 5.17
q4'01 -0.74
q1'02 -0.35
q2'02 4.27
q3'02 6.23
q4'02 0.5
q1'03 0.81
q2'03 2.29
q3'03 -0.71
q4'03 -0.16
q1'04 2.8
q2'04 -2.76
q3'04 2.86
q4'04 0.76
q1'05 -0.33
q2'05 2.87
Average 1.43
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Efficient Frontier
Portfolio 1
Portfolio 2
Portfolio 3
Portfolio 4
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Equity to Bond Weights

• Years 0-10
• 90 equity, 10 bonds
• Years 11-15
• 80 equity, 20 bonds
• Years 16-17
• 70 equity, 30 bonds
• Years 18-21
• 60 equity, 40 bonds

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Investment Schedule
Year 90/10 80/20 70/30 60/40
0 5,000.00      
1 8,543.16      
2 12,825.55      
3 18,001.38      
4 24,257.05      
5 31,817.87      
6 40,956.12      
7 52,000.91      
8 65,350.01      
9 81,484.16      
10 100,984.43      
11 124,553.09 124,553.09    
12   150,942.93    
13   182,394.45    
14   219,878.52    
15   264,552.19    
16   317,794.48 317,794.48  
17     375,900.92  
18     316,674.60 316,674.60
19       241,755.98
20       154,989.16
21       54,500.35
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Returns Risk Versus Indices
Total Returns Weighted Portfolio Return Weighted Index Return
q1'01 -0.12 -10.48
q2'01 9.47 5.46
q3'01 -11.21 -12.93
q4'01 14.31 9.51
q1'02 2.35 0.19
q2'02 -6.61 -11.65
q3'02 -6.73 -14.89
q4'02 14.08 7.63
q1'03 1.04 -2.79
q2'03 27.09 14.08
q3'03 7.04 2.26
q4'03 15.25 10.91
q1'04 6.80 1.79
q2'04 -0.08 1.25
q3'04 1.98 -1.42
q4'04 14.01 8.37
q1'05 0.61 -1.97
q2'05 4.61 1.51
Average 5.22 0.38

• Regression analysis on 90/10 portfolio to the
  Index yields
• R-squared of 88 percent
• Alpha of 4.82
• Beta of 1.04

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Portfolio Return on Index Return
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Conclusions

• Investment strategy comfortably will fund your
  childs 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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• DO YOU HAVE ANY QUESTIONS?