Question 1 (5 pts)

Samantha (Age 26) isnt excited about individual stock ownership because she wants to be sufficiently diversified. She instead purchases mutual funds that invest in stocks. She identified the following four mutual funds, each of which invests in large-company stocks. The two passive funds seek to track the S&P 500 Index. Assuming similar risks across the funds, which of the four mutual funds would be the best purchase? Why?

	Fund A	Fund B	Fund C	Fund D
Management Approach	Active	Passive	Passive	Active
Annual Expense Ratio	1.5%	0.4%	0.30%	1.3%
Max Sales Load	5.0%	0.0%	0.0%	4%

Assume that Samantha begins contributing $3,000 per year into a retirement investment account. If she can earn an average annual return of 8% on her investment, how much will she have accumulated at age 67?

Question 2: Planning for the Future (10 pts)

Ayasha, age 30, is beginning to contemplate her financial future. Right now, she lives in a large city where she rents a one-bedroom apartment. Although she loves the excitement of the city, she knows that someday she would like to move to the country and live in a farmhouse. Her goal is to begin saving for this objective right away. Ayasha has identified three possible portfolios that might be appropriate choices as she begins investing to reach her objective. Each portfolio consists of the following stocks, bonds, and cash assets.

Portfolio 1	Portfolio 2	Portfolio 3
10% cash	10% cash	15% cash
20% bonds	40% bonds	50% bonds
70% stocks	50% stocks	35% stocks

Instructions

• Calculate the weighted average rate of return for each portfolio, assuming that the average return of each asset is as follows. (Hint: Multiply the allocation percentage by the rate of return to determine the weighted average for the asset: stocks 9%, bonds 4%, and cash assets 2%.)
• Which portfolio has the greatest level of uncertainty associated with the returns? How can you tell?
• If Ayashas risk tolerance is below average and she has a long-time horizon (15 years), which of the three portfolios would be most appropriate for her?
• If Ayashas time horizon for goal achievement is 4 years, which portfolio would be most appropriate?
• What type of risk does Ayasha face if she invests in portfolio 3?