"Your next-door neighbor, Scott Jansen, has a 12-year-old daughter, and he wants to pay the tuition for her first year of college 6 years from now. The tuition for the first year will be $17,500. Scott has gone through his budget and finds that he can invest $200 per month for the next 6 years. Scott has opened accounts at two mutual funds. The first fund follows an investment strategy designed to match the return of the S&P 500. The second fund invests in short-term Treasury bills. Both funds have very low fees.

Scott has decided to follow a strategy in which he contributes a fixed fraction of the $200 to each fund. An adviser from the first fund suggested that each month he invest 80% of the $200 in the S&P 500 fund and the other 20% in the T-bill fund. The adviser explained that the S&P 500 has averaged much larger returns than the T-bill fund. Even though stock returns are risky investments in the short run, the risk would be fairly minimal over the longer 6-year period.

An adviser from the second fund recommended just the opposite: invest 20% in the S&P 500 fund and 80% in T-bills, he said. Treasury bills are backed by the United States government. If you follow this allocation, he said, your average return will be lower, but at least you will have enough to reach your $17,500 target in 6 years. Not knowing which adviser to believe, Scott has come to you for help.

Questions:

Simulate 1000 iterations of the two strategies over the 6-year period.

Based on your simulation results, which of the two strategies would you recommend? Why?

NOTE: We are using the @RISK software for Excel. Please provide the answer using this tool."

Please use this link below for a free trial download of the the @RISK software:

http://www.palisade.com/trials.asp

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