Details of Project

Investment Plan for Studying Overseas

Mr Terry has a twelve-year-old daughter who wants to go to college overseas -she wants to take a programme not offered in any of the universities in Jamaica. Mr Terry decides that he needs to put plan in place to ensure that this happens six years from now.

The financial forecast shows that the average cost per year for one of the universities (in Canada) that offers this programme is CAN$24, 000. Based on Mr Terry's current financial status, he thinks he can invest CAN$220 per month for the next six years. Mr Terry is considering opening two low-fees mutual fund accounts. The first fund is projected to follow an investment strategy designed to match the return of what he calls "Investment Plan A" (IPA), while the second fund will be what he calls the "Investment Plan B" (IPB). Both investment plans have very low fees.

Mr Terry also plans to follow a strategy in which he will contribute a fixed fraction of the CAN$220 to each plan. He also reported that an adviser from the first fund suggested that each month he should invest 80% of the CAN$220 in the IPA and the other 20% in the IPB (Strategy 1). He said that the adviser explained that the IPA has averaged much larger returns than the IPB. He projects that even though the IPA returns are risky investments in the short run, the risk would be fairly minimal over the longer six-year period.

Another adviser (who is linked to the IPB) has recommended just the opposite: invest 20% in the IPA and 80% in IPB (Strategy 2). This adviser claims that the IPB plan is usually backed by the government. Mr Terry has been advised that if he follows this allocation the average return might be lower, but at he should have enough to reach his CAN$24,000 target in six years.

Not knowing which adviser to follow, Mr Terry has asked for some help; with a willingness to even pay for any assistance given that will lead to him making the optimal decision.

Your group has decided to take on the challenge to help Mr Terry. Part of your research led to the collection of data, showing 261 monthly returns of the IPA and the IPB (see attached file - Overseas_Plan.xlsx). Your group also came across data which shows that the returns of the IPA and IPB can be approximated by the Normal Probability distribution, as given below

IPA

= 1.05%

= 0.98%

IPB = 2.8%

= 0.22%

Required

Using the information provided do the following:

1. Develop a simulation model of the two suggested investment strategies (20:80 & 80:20) over the six-year period for both scenarios given below:
2. Using the 261 data points (Scenario 1) (3 Marks)
3. Using the Normal Distribution (Scenario 2) (2 Marks)
4. Determine the total value of each strategy after six years, under each of the scenarios and state if either of the strategies (20:80 & 80:20) achieve the projected tuition target. (2 Marks)
5. Do 1000 replications of each strategies under each of the scenarios and compute and interpret a 95% for each of the strategies under each of the scenarios (3 Marks)
6. Conduct sensitivity analysis of strategy 2, under scenario 2, over 1000 replications, using the following standard deviations (holding the mean returns constant): 1.5%, 1.8%, 2.2, 2.8 and 3.2%. (3 Marks)
7. Calculate the average returns (from the 1000 replications) and make the highlighting of the standard deviations that gives the maximum average returns randomly generated (1 Mark)
8. Generate a graph of reflect what has been done in 4(a), and display the generated graph as a chart on a separate sheet. (1 Mark)