Hi Vandana, this is a case study for my investment class. a little heavier than the last one I asked you about. Could you please help? details attached.

Original Portfolio Mean Return Standard Deviation Beta Geometric Average Market (S&P500) 0.879% 3.439% 1.0000 0.820% FCNTX DODFX PRDSX Correlation S&P with FCNTX S&P with DODFX S&P with PRDSX FCNTX with DODFX FCNTX with PRDSX DODFX with PRDSX First, Joe would like to understand where he has been. He wants to understand how his investments have performed since 2001 and needs some information. Q1) Fill in above the monthly arithmetic average return, standard deviation, beta and geometric average return of each of the three funds over this time period. Q2) Calculate the correlations of each of the 3 funds with each other and the S&P 500 and fill in the spaces above. Q3) What was the monthly geometric return on his portfolio given the asset allocation? Portfolio Monthly Return Q4) What is the theoretical value of the portfolio for Joe on 12/31/14 and using the gross returns presented in exhibit 1? 12/31/14 Value Q5) What was the value of each of the three investments and please EXPLAIN to Joe why the asset allocation doesn't match his contribution allocation. NOTE: a rounding error with the answer in Q4 is acceptable. DOLLARS FCNTX DODFX PRDSX TOTAL Value $ - PERCENT FCNTX DODFX PRDSX TOTAL Allocation 0.0% Q6) Calculate the portfolio value that Joe most likely saw on his statement (which was presented NET(after) of fund fees). EXPLAIN to him the difference between the portfolio values calcluated Gross of fees and what he sees on his statement. DOLLARS FCNTX DODFX PRDSX TOTAL Statement $ - Q7) How much has Joe paid in active management fees and how much will he pay next year based on his current balance. Dollars Fees since June 2001 Projected Fees next year $ $ - Q8) How did the portfolio returns compare to the returns of the S&P 500 (Gross of Fees)? Was Active management worth the fees during this time period? Q9) Were there any benefits of diversification when he only had the three funds? EXPLAIN and give evidence. Q10) Joe now has an S&P Index Fund and a Bond Fund (PTTRX) that he may choose for his investments. The S&P Index fund has the same return/standard deviation and correlations as the Index already presented above. Calculate the Arithmentic average, standard deviation, geometric average and correlations for PTTRX below. Mean Return Standard Deviation Beta Geometric Average Correlation S&P with PTTRX FCNTX with PTTRX PRDSX with PTTRX DODFX with PTTRX Potential Portfolio Construction Joe is about to retire and decides that he wants to simplify his portfolio to just two investments in risky assets. Given the low cost of an S&P 500 Index ETF Joe decides that will be certainly one of the investments. He now understands diversification so he is asking your help to select the fund that best diversifies the S&P Index ETF. His goal is to select a fund to go with the S&P 500 that offers the BEST diversification and lowest portfolio standard deviation. Q11) Select the second fund below and put in the ticker and complete the Mean, Std Deviation ans Correlation with that fund. Use that information to complete an efficient frontier with different weights in each. Mean Standard Deviation Prospect ive Risky Port folio FUND 1 FUND 2 S&P 500 Index 0.879% 3.439% 1200.000% Correlation of 1 with 2 1000.000% Portfolio Expectations Standard Deviation and Returns Weight of S&P Weight of Fund 2 Port Stand. Dev 0.00 1.00 0.05 0.95 0.10 0.90 0.15 0.85 0.20 0.80 0.25 0.75 0.30 0.70 0.35 0.65 0.40 0.60 0.45 0.55 0.50 0.50 0.55 0.45 0.60 0.40 0.65 0.35 0.70 0.30 0.75 0.25 0.80 0.20 0.85 0.15 0.90 0.10 0.95 0.05 1.00 0.00 Port Return 800.000% Ret urn 600.000% 400.000% 200.000% 0.000% 0.000% 200.000% 400.000% 600.000% 800.000% 1000.000% 1200.000% 1000.000% 1200.000% St andard Deviat ion Q12) Given Joe's goal of risk minimization which allocation of risky assets would you recommend and why? Weight of S&P Weight of Fund 2 Port Stand. Dev Port Return Q13) Joe learns that he has a money market available with a return equal to the risk-free rate of .25% per month. He wonders if he uses the money market can he invest his risky asset portfolio into an allocation that comes as close to his prior three-fund historical return as possible. Find the allocation from the efficient frontier table that closely matches the portfolio return from Q3. Complete the Capital Market Line portfolio below with the Risk-Free Money Market and the New Risky Portfolio. Note: the Risk Free Rate has a Standard Deviation of 0. Weight of S&P Weight of Fund 2 Port Stand. Dev Port Return New Risky Portfolio Weight of Money Market 0.00 0.05 0.10 0.15 0.20 0.25 0.30 0.35 0.40 0.45 0.50 0.55 0.60 0.65 0.70 0.75 0.80 0.85 0.90 0.95 1.00 Weight of Risky Portfolio Port Stand. Dev 1.00 0.95 0.90 0.85 0.80 0.75 0.70 0.65 0.60 0.55 0.50 0.45 0.40 0.35 0.30 0.25 0.20 0.15 0.10 0.05 0.00 Port Return 1200.000% 1000.000% 800.000% Ret urn 600.000% 400.000% Q14) Joe would rather get the higher return in his risky portfolio but also to control his portfolio risk. Which allocation of Money Market and New Risky Portfolio gives him a portfolio standard deviation close to the min risk portfolio in Q12. Weight of Money Market Weight of Risky Portfolio Port Stand. Dev Prospect ive Tot al Port folio Port Return Q15) Joe is now has to decide whether to invest 100% of his assets in the portfolio in Q12 or to split his allocation between the Money Market and the New Risky Portfolio in Q14. Help Joe to decide which portfolio is better and explain your answer. 200.000% 0.000% 0.000% 200.000% 400.000% 600.000% 800.000% St andard Deviat ion EXHIBIT 1 - Security Monthly Return Data Returns in Percent and for Month Indicated (not annualized) Short Name S&P FCNTX DODFX PRDSX PTTRX Name S&P Index Fund Fidelity ContraFund Dodge&Cox International Stock T. Rowe Price Diversifed Small PIMCO Total Return Bond Description S&P 500 Index Large US Stocks Large Non-US Stocks Small US Stocks US Fixed Income MONTHLY RETURNS DATE FCNTX Dec-14 Nov-14 Oct-14 Sep-14 Aug-14 Jul-14 Jun-14 May-14 Apr-14 Mar-14 Feb-14 Jan-14 Dec-13 Nov-13 Oct-13 Sep-13 Aug-13 Jul-13 Jun-13 May-13 Apr-13 Mar-13 Feb-13 Jan-13 Dec-12 Nov-12 Oct-12 Sep-12 Aug-12 Jul-12 Jun-12 May-12 Apr-12 Mar-12 Feb-12 Jan-12 Dec-11 Nov-11 Oct-11 Sep-11 Aug-11 Jul-11 Jun-11 May-11 Apr-11 Mar-11 Feb-11 Jan-11 Dec-10 Nov-10 Oct-10 Sep-10 Aug-10 Jul-10 Jun-10 May-10 Apr-10 Mar-10 Feb-10 Jan-10 Dec-09 Nov-09 Oct-09 Sep-09 Aug-09 Jul-09 Jun-09 DODFX PRDSX -0.61% -4.68% 1.07% 2.15% 1.85% 0.77% 1.48% -1.75% 4.78% -1.13% -3.85% -3.79% 4.44% 2.20% 5.68% -1.44% -0.99% -4.52% 2.41% 1.00% 5.38% 3.30% 2.70% 0.91% -1.79% 1.22% -3.09% -2.64% 1.28% -2.96% 5.57% 6.07% 4.74% -2.24% -4.34% -2.00% 2.48% 1.71% 2.31% 2.85% 1.41% 3.76% 4.86% 4.53% 2.96% 5.19% 8.07% 6.63% -1.52% -2.87% -1.33% 5.17% 5.89% 7.89% -1.72% -3.26% -0.78% 1.98% 0.96% 4.02% 1.82% 4.12% 0.05% 3.69% 0.53% 4.03% 1.34% -1.81% 1.34% 3.91% 4.99% 6.77% 0.18% 5.65% 1.72% 1.89% 1.67% 1.80% -3.59% 1.54% -2.10% 3.11% 3.44% 1.73% 2.48% 3.12% 4.15% 0.80% 0.70% -0.18% 2.34% 6.34% 3.22% -5.62% -11.72% -7.34% -0.12% -2.37% -1.08% 3.76% 0.15% 1.38% 5.49% 5.82% 4.51% 5.01% 6.36% 7.64% -1.06% -2.52% -1.46% -0.67% -3.11% 0.49% 10.19% 10.46% 16.45% -7.43% -11.22% -10.94% -4.91% -9.31% -8.06% 0.38% -2.77% -3.85% -1.58% -2.13% -1.78% -1.60% -2.99% -1.48% 2.70% 5.82% 3.63% 0.20% -0.95% 3.52% 4.12% 2.98% 5.84% 0.59% 0.50% 1.71% 3.95% 7.98% 7.11% 1.10% -4.39% 4.46% 4.15% 4.59% 5.13% 10.10% 10.88% 13.41% -2.82% -3.85% -5.95% 4.89% 10.81% 7.59% -3.25% -1.87% -6.46% -6.58% -11.39% -7.25% 1.66% -1.15% 4.65% 5.57% 8.58% 8.21% 2.85% -0.49% 5.39% -4.58% -4.02% -4.47% 2.97% 2.30% 7.95% 5.48% 3.14% 3.39% -1.16% -3.19% -5.35% 5.56% 5.86% 7.68% 1.78% 5.14% 1.86% 6.02% 11.76% 8.14% 0.02% -1.09% 1.83% Relative Return PTTRX S&P 500 -0.48% -0.42% 1.00% 2.45% 0.81% 2.32% -0.94% -1.55% 2.11% 3.77% -0.52% -1.51% 0.37% 1.91% 0.24% 2.10% 0.74% 0.62% -0.55% 0.69% 0.52% 4.31% 0.35% -3.56% -1.96% 2.36% 0.00% 2.80% 0.43% 4.46% 0.78% 2.97% -1.08% -3.13% 0.49% 4.95% -2.62% -1.50% -2.16% 2.08% 1.18% 1.81% 0.33% 3.60% 0.55% 1.11% -0.27% 5.04% 0.25% 0.71% 0.54% 0.28% 0.37% -1.98% 0.91% 2.42% 0.48% 1.98% 0.24% 1.26% 0.45% 3.96% 0.86% -0.27% 1.47% -0.75% 0.04% 3.13% 0.25% 4.06% 0.58% 4.36% -0.28% 0.85% -0.90% -0.51% 1.41% 10.77% -1.74% -2.18% -0.57% -5.68% 1.26% -2.15% -0.36% -1.83% 0.56% -1.35% 1.66% 2.85% 0.29% -0.10% -0.45% 3.20% -1.71% 2.26% -0.56% 6.53% -1.43% -0.23% 0.05% 3.69% 0.77% 8.76% 1.99% -4.74% 1.51% 6.88% 1.70% -5.39% -0.02% -3.20% 0.82% 1.48% 0.70% 5.88% 0.51% 2.85% 1.76% -3.70% -0.86% 1.78% 0.05% 5.74% 0.61% -1.98% 1.76% 3.57% 1.91% 3.36% 2.25% 7.41% 0.69% 0.02% FCNTX DODFX PRDSX 0.994 0.953 1.022 1.018 1.015 0.983 0.989 0.961 1.044 1.022 0.986 0.990 1.024 1.010 1.033 1.027 0.982 1.012 0.974 1.013 1.056 1.061 0.978 0.957 1.025 1.017 1.029 1.014 1.049 1.045 1.052 1.081 0.985 0.971 1.052 1.059 0.983 0.967 1.020 1.010 1.018 1.041 1.037 1.005 1.013 0.982 1.039 1.050 1.002 1.056 1.019 1.017 0.964 1.015 1.031 1.034 1.025 1.031 1.008 1.007 1.023 1.063 0.944 0.883 0.999 0.976 1.038 1.002 1.055 1.058 1.050 1.064 0.989 0.975 0.993 0.969 1.102 1.105 0.926 0.888 0.951 0.907 1.004 0.972 0.984 0.979 0.984 0.970 1.027 1.058 1.002 0.991 1.041 1.030 1.006 1.005 1.040 1.080 1.011 0.956 1.042 1.046 1.101 1.109 0.972 0.962 1.049 1.108 0.968 0.981 0.934 0.886 1.017 0.988 1.056 1.086 1.028 0.995 0.954 0.960 1.030 1.023 1.055 1.031 0.988 0.968 1.056 1.059 1.018 1.051 1.060 1.118 1.000 0.989 PTTRX 1.011 1.008 1.048 0.962 1.057 0.955 1.054 1.009 0.969 0.970 1.047 0.980 1.023 1.038 1.030 1.066 0.987 1.079 0.992 1.040 1.001 1.040 1.013 1.068 1.017 1.018 0.979 1.017 1.041 0.998 1.032 0.927 0.989 1.014 1.045 1.076 0.985 1.005 1.165 0.891 0.919 0.962 0.982 0.985 1.036 1.035 1.058 1.017 1.071 1.045 1.051 1.134 0.941 1.076 0.935 0.927 1.046 1.082 1.054 0.955 1.080 1.034 0.947 1.077 1.019 1.081 1.018 S&P 500 0.995 1.010 1.008 0.991 1.021 0.995 1.004 1.002 1.007 0.994 1.005 1.003 0.980 1.000 1.004 1.008 0.989 1.005 0.974 0.978 1.012 1.003 1.005 0.997 1.003 1.005 1.004 1.009 1.005 1.002 1.005 1.009 1.015 1.000 1.003 1.006 0.997 0.991 1.014 0.983 0.994 1.013 0.996 1.006 1.017 1.003 0.996 0.983 0.994 0.986 1.001 1.008 1.020 1.015 1.017 1.000 1.008 1.007 1.005 1.018 0.991 1.001 1.006 1.018 1.019 1.023 1.007 0.996 1.025 1.023 0.984 1.038 0.985 1.019 1.021 1.006 1.007 1.043 0.964 1.024 1.028 1.045 1.030 0.969 1.049 0.985 1.021 1.018 1.036 1.011 1.050 1.007 1.003 0.980 1.024 1.020 1.013 1.040 0.997 0.993 1.031 1.041 1.044 1.009 0.995 1.108 0.978 0.943 0.979 0.982 0.986 1.028 0.999 1.032 1.023 1.065 0.998 1.037 1.088 0.953 1.069 0.946 0.968 1.015 1.059 1.029 0.963 1.018 1.057 0.980 1.036 1.034 1.074 1.000 May-09 Apr-09 Mar-09 Feb-09 Jan-09 Dec-08 Nov-08 Oct-08 Sep-08 Aug-08 Jul-08 Jun-08 May-08 Apr-08 Mar-08 Feb-08 Jan-08 Dec-07 Nov-07 Oct-07 Sep-07 Aug-07 Jul-07 Jun-07 May-07 Apr-07 Mar-07 Feb-07 Jan-07 Dec-06 Nov-06 Oct-06 Sep-06 Aug-06 Jul-06 Jun-06 May-06 Apr-06 Mar-06 Feb-06 Jan-06 Dec-05 Nov-05 Oct-05 Sep-05 Aug-05 Jul-05 Jun-05 May-05 Apr-05 Mar-05 Feb-05 Jan-05 Dec-04 Nov-04 Oct-04 Sep-04 Aug-04 Jul-04 Jun-04 May-04 Apr-04 Mar-04 Feb-04 Jan-04 Dec-03 Nov-03 Oct-03 Sep-03 Aug-03 Jul-03 Jun-03 May-03 Apr-03 Mar-03 Feb-03 Jan-03 6.29% 6.24% 6.97% -7.30% -5.66% 1.65% -6.99% -15.84% -9.62% -0.77% -4.14% -4.91% 3.30% 5.31% -1.56% -0.32% -9.51% 0.40% -2.73% 5.01% 6.12% 1.83% -0.84% -0.21% 4.10% 3.48% 1.39% -2.10% 2.18% 0.03% 2.65% 3.62% 1.08% 1.12% -1.39% 0.78% -3.90% 2.46% 2.06% -2.81% 5.59% 1.35% 4.08% -1.61% 2.93% 0.85% 4.42% 1.74% 4.59% -3.23% -1.28% 3.02% -1.34% 2.65% 5.31% 0.86% 4.22% -0.18% -4.48% 2.20% 1.63% -1.45% 0.57% 3.20% -0.04% 2.66% 1.84% 6.49% -0.81% 3.16% 2.65% 1.81% 4.88% 4.71% 2.22% -1.26% -3.06% 14.43% 17.84% 10.88% -10.47% -12.33% 6.16% -7.90% -24.50% -14.29% -3.27% -1.69% -8.87% 1.15% 7.55% -1.63% -1.35% -8.06% -0.60% -3.65% 3.77% 3.76% -1.40% -1.88% 0.10% 3.19% 3.25% 2.83% 0.38% 1.74% 3.99% 3.33% 3.68% -0.20% 1.77% 1.72% -0.41% -4.68% 6.60% 4.59% -1.37% 6.54% 4.17% 3.12% -2.63% 3.26% 3.24% 2.92% 1.76% 1.16% -2.92% -3.20% 5.57% -0.39% 4.76% 7.53% 3.10% 4.32% 1.38% -2.01% 4.49% 0.90% -3.08% 0.64% 3.84% 3.07% 6.73% 2.33% 6.02% 2.32% 6.67% 8.53% 2.39% 6.43% 12.54% -2.92% -6.14% -3.10% 3.57% 13.26% 7.32% -8.44% -6.17% 4.39% -10.11% -20.70% -11.96% 2.06% -0.66% -4.53% 5.67% 7.36% -1.33% -2.14% -8.14% 0.21% -6.34% 2.86% 3.47% 1.93% -3.83% -0.18% 6.01% 3.03% 0.88% -0.34% 2.00% -0.62% 2.25% 3.56% 1.10% 2.64% -5.29% -1.55% -6.63% -1.04% 3.71% -0.47% 6.42% -0.36% 5.56% -1.55% 0.67% -1.39% 5.66% 2.79% 7.08% -5.18% -1.59% 2.78% -3.63% 4.62% 6.41% 1.24% 3.78% -2.69% -8.54% 2.27% 1.71% -2.98% 0.17% 0.84% 3.91% -0.43% 3.77% 8.06% -3.47% 4.81% 4.95% 3.74% 9.48% 8.24% 2.60% -3.63% -2.68% 1.57% 1.41% 1.73% -0.83% 0.61% 3.88% 2.00% -0.89% -3.18% 1.00% 0.14% -0.87% -0.85% 0.42% -0.16% 0.18% 2.31% 0.40% 0.37% 1.12% 1.95% 1.38% 1.20% -0.15% -1.37% 0.21% 0.25% 1.66% -0.20% -0.83% 1.18% 0.60% 0.80% 1.48% 1.56% -0.06% -0.29% 0.07% -1.01% 0.35% 0.15% 1.02% 0.37% -0.89% -1.04% 1.36% -0.79% 0.51% 1.15% 1.52% -0.22% -0.37% 0.30% 0.71% -0.34% 1.01% 0.17% 0.98% 1.07% 0.46% -0.36% -2.28% 0.84% 1.17% 0.67% 1.19% 0.23% -0.66% 1.34% 0.85% -3.75% -0.03% 1.69% 1.15% 0.21% 1.42% 0.44% 5.31% 9.39% 8.54% -5.99% -2.57% 0.78% -7.48% -1.94% -1.08% 1.22% -0.99% -8.60% 1.07% 4.75% -0.60% -3.48% -6.12% -0.86% -4.40% 1.48% 3.58% 1.29% -3.20% -1.78% 3.25% 4.33% 1.00% -2.18% 1.41% 1.26% 1.65% 3.15% 2.46% 2.13% 0.51% 0.01% -3.09% 1.22% 1.11% 0.05% 2.55% -0.10% 3.52% -1.77% 0.69% -1.12% 3.60% -0.01% 3.00% -2.01% -1.91% 1.89% -2.53% 3.25% 3.86% 1.40% 0.94% 0.23% -3.43% 1.80% 1.21% -1.68% -1.64% 1.22% 1.73% 5.08% 0.71% 5.50% -1.19% 1.79% 1.62% 1.13% 5.09% 8.10% 0.84% -1.70% -2.74% 1.063 1.062 1.070 0.927 0.943 1.016 0.930 0.842 0.904 0.992 0.959 0.951 1.033 1.053 0.984 0.997 0.905 1.004 0.973 1.050 1.061 1.018 0.992 0.998 1.041 1.035 1.014 0.979 1.022 1.000 1.027 1.036 1.011 1.011 0.986 1.008 0.961 1.025 1.021 0.972 1.056 1.013 1.041 0.984 1.029 1.008 1.044 1.017 1.046 0.968 0.987 1.030 0.987 1.026 1.053 1.009 1.042 0.998 0.955 1.022 1.016 0.986 1.006 1.032 1.000 1.027 1.018 1.065 0.992 1.032 1.027 1.018 1.049 1.047 1.022 0.987 0.969 1.144 1.178 1.109 0.895 0.877 1.062 0.921 0.755 0.857 0.967 0.983 0.911 1.012 1.075 0.984 0.987 0.919 0.994 0.963 1.038 1.038 0.986 0.981 1.001 1.032 1.032 1.028 1.004 1.017 1.040 1.033 1.037 0.998 1.018 1.017 0.996 0.953 1.066 1.046 0.986 1.065 1.042 1.031 0.974 1.033 1.032 1.029 1.018 1.012 0.971 0.968 1.056 0.996 1.048 1.075 1.031 1.043 1.014 0.980 1.045 1.009 0.969 1.006 1.038 1.031 1.067 1.023 1.060 1.023 1.067 1.085 1.024 1.064 1.125 0.971 0.939 0.969 1.036 1.133 1.073 0.916 0.938 1.044 0.899 0.793 0.880 1.021 0.993 0.955 1.057 1.074 0.987 0.979 0.919 1.002 0.937 1.029 1.035 1.019 0.962 0.998 1.060 1.030 1.009 0.997 1.020 0.994 1.022 1.036 1.011 1.026 0.947 0.985 0.934 0.990 1.037 0.995 1.064 0.996 1.056 0.984 1.007 0.986 1.057 1.028 1.071 0.948 0.984 1.028 0.964 1.046 1.064 1.012 1.038 0.973 0.915 1.023 1.017 0.970 1.002 1.008 1.039 0.996 1.038 1.081 0.965 1.048 1.049 1.037 1.095 1.082 1.026 0.964 0.973 1.016 1.014 1.017 0.992 1.006 1.039 1.020 0.991 0.968 1.010 1.001 0.991 0.992 1.004 0.998 1.002 1.023 1.004 1.004 1.011 1.019 1.014 1.012 0.998 0.986 1.002 1.003 1.017 0.998 0.992 1.012 1.006 1.008 1.015 1.016 0.999 0.997 1.001 0.990 1.003 1.002 1.010 1.004 0.991 0.990 1.014 0.992 1.005 1.012 1.015 0.998 0.996 1.003 1.007 0.997 1.010 1.002 1.010 1.011 1.005 0.996 0.977 1.008 1.012 1.007 1.012 1.002 0.993 1.013 1.009 0.963 1.000 1.017 1.012 1.002 1.014 1.004 1.053 1.094 1.085 0.940 0.974 1.008 0.925 0.981 0.989 1.012 0.990 0.914 1.011 1.048 0.994 0.965 0.939 0.991 0.956 1.015 1.036 1.013 0.968 0.982 1.033 1.043 1.010 0.978 1.014 1.013 1.016 1.032 1.025 1.021 1.005 1.000 0.969 1.012 1.011 1.000 1.025 0.999 1.035 0.982 1.007 0.989 1.036 1.000 1.030 0.980 0.981 1.019 0.975 1.032 1.039 1.014 1.009 1.002 0.966 1.018 1.012 0.983 0.984 1.012 1.017 1.051 1.007 1.055 0.988 1.018 1.016 1.011 1.051 1.081 1.008 0.983 0.973 Dec-02 Nov-02 Oct-02 Sep-02 Aug-02 Jul-02 Jun-02 May-02 Apr-02 Mar-02 Feb-02 Jan-02 Dec-01 Nov-01 Oct-01 Sep-01 Aug-01 Jul-01 Jun-01 -0.72% -0.43% 2.36% -4.09% 0.89% -6.84% 1.23% 0.39% 0.09% 3.33% 0.12% -0.56% 2.36% 3.42% 0.79% -5.47% -3.00% -0.54% -2.56% -1.13% 4.72% 4.95% -14.51% 0.12% -9.77% -8.45% 3.31% 0.40% 9.01% 1.51% -2.61% 1.71% 8.90% 1.90% -14.43% 0.16% -0.99% -4.28% -6.92% 8.77% 6.16% -7.52% 0.86% -12.79% -10.41% -3.94% -2.59% 7.91% -4.69% -3.80% 6.50% 9.26% 8.12% -15.98% -5.89% -5.25% 2.13% 0.25% 0.20% 0.00% 1.15% 1.68% 0.57% 0.26% 0.78% 2.21% -1.96% 1.40% 1.24% -0.44% -1.42% 2.15% 1.66% 1.24% 3.47% 0.27% -6.03% 5.71% 8.64% -2.00% 0.49% -2.90% -3.25% -0.91% -0.64% 3.67% -2.08% -1.56% 0.76% 7.52% 1.81% -3.17% -6.41% -1.07% -2.50% 0.993 0.996 1.024 0.959 1.009 0.932 1.012 1.004 1.001 1.033 1.001 0.994 1.024 1.034 1.008 0.945 0.970 0.995 0.974 0.989 1.047 1.049 0.855 1.001 0.902 0.915 1.033 1.004 1.090 1.015 0.974 1.017 1.089 1.019 0.856 1.002 0.990 0.957 0.931 1.088 1.062 0.925 1.009 0.872 0.896 0.961 0.974 1.079 0.953 0.962 1.065 1.093 1.081 0.840 0.941 0.947 1.021 1.002 1.002 1.000 1.012 1.017 1.006 1.003 1.008 1.022 0.980 1.014 1.012 0.996 0.986 1.021 1.017 1.012 1.035 1.003 0.940 1.057 1.086 0.980 1.005 0.971 0.968 0.991 0.994 1.037 0.979 0.984 1.008 1.075 1.018 0.968 0.936 0.989 0.975 Case Study: 401(k) at Behemoth Corporation ______________________________________________________________________ Joe was a mid-career manager who started working at Behemoth Corp. in May of 2001. Behemoth had an outstanding benefits plan and he was eligible to participate in the company's 401(k) in June of 2001. Joe wasn't very experienced in investments but, he knew that he had to start contributing as much as possible right away give himself the best chance at an adequate retirement in the future. Together with the generous company match Joe was contributing $1,000 per month to his retirement plan. The current plan was very basic and Joe only had the following three choices available: TICKER NAME CATEGORY FCNTX DODFX PRDSX Fidelity ContraFund Dodge&Cox International Stock T. Rowe Price Diversifed Small Large US Stocks Large Non-US Stocks Small US Stocks Given that Joe was not really experienced he naively split the monthly contribution among the three funds equally. He would casually review his 401(k) statements at year end and, as long as the balance was growing he was satisfied that he was on track for retirement and did not give it much further thought. In the fall of 2014 Joe enrolled in an introductory Investments class as part of the MBA program at a local college. By the end of the course he had a much better idea of some of the basic principles of investing. He felt badly that he had not paid more attention to his 401(k) and specifically the investment choices he made as part of his portfolio. Joe went home to look at the December 2014 statement that were recently delivered. He also researched and reviewed what information he could on the three mutual funds. This included the prospectus of each fund, the fees and the performance history. He summarized the monthly performance for each fund since June 2001 (spreadsheet - Exhibit 1). Through the class he realized that these funds were actively managed and that the fees of 1.50% each were rather high as compared to other investment choices. He also knew that he should have been comparing the performance of the funds with their respective benchmarks during the last 13 1/2 years but thought that was water under the bridge at this point and he was better served to focus his attention on the future. As a first step he wanted to get a handle on where he was right now and consider future options. Before he could start he wanted to reconcile his statement to the fund performance he researched. Upon looking at the fund performance and the statement he noticed that the balances were less than what he calculated using the advertised gross of fees performance reported by the funds. This left him a little confused. In January 2015 Behemoth was introducing a few new more choices to the 401(k) options. In order to round out the offerings they added an S&P Index Fund, which tracks the S&P 500 Index exactly, a bond fund (PTTRX - PIMCO Total Return Fund) and a money market fund (Currently paying 3.00%). The three choices previously offered were all equity funds so these new investments offered a passive option and two different asset classes (Fixed Income and Cash). Assimilating all of this information Joe decided that he needed more experienced help so he turned to you. Joe emailed you a spreadsheet on his fund research which contained monthly security return information on the funds (including the new ones). He also included some questions for you to help him answer. The first tab in the sheet addresses questions on the portfolio that he has accumulated to this point. The questions also include understanding the current mutual fund returns and why their portfolio balance doesn't match they information they researched. He is also interested in learning more about the portfolio itself and its composition. He learned in class that Modern Portfolio Theory can help him to decide investment choices with a portfolio viewpoint and that diversification is a key element in managing a portfolio. In that theory, correlation among the individual asset choices has more effect on the performance and risk of a diversified portfolio more than any other factor. Joe wants to simplify his portfolio in the future and be more deliberate about the investment choices he makes. He also realized that risk tolerance is key to determining the proper allocation of the portfolio. Through a self-examination Joe determined that he is generally a conservative investor. The next tab sheet specifically examines potential portfolios for Joe based on his specific factors goals and risk tolerance as well as the elements of MPT. This will help guide him in choosing among the alternative investments to build his future portfolio. He is hoping to get information from you about which funds to select among the choices and what allocation to target for each fund to be as efficient as possible