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Econ 223
Assignment 8
(November 4 )
Purpose: Describe characteristics of your family that will influence the family's investment decisions & help to determine its net worth.
Your work for this assignment will include a new worksheet addition to your Master Spreadsheet, as well as a separate write-up.
Resources: Witte & Gulley Investing I, Investing II, Investing III presentations, Swensen Chapters 1-4, Betty Febo, the House Price Calculator found in the Office of Federal Housing Enterprise Oversight (OFHEO) website at: http://www.ofheo.gov/; the article by Grabel and McGill that gives the mean return and standard deviation of returns for various occupations, and the Mortgage & Loan Examples excel spreadsheet (revised 10-26-08) found in the Presentation1 & Purchasing II folders in the First Class conference.
Begin by downloading the Prototype Worksheet Template titled “Risk, Goals & Background Template for Assn 8” from the First Class conference. Copy this entire worksheet into your Master Prototype Spreadsheet, keeping the same worksheet title.
Next estimate your families risk capacity and risk attitude and record your estimates in the Risk, Goals & Background Template for Assn 8 worksheet. In a separate word document for this Assignment #8, be sure to discuss why your family has the risk attitude & risk capacity that you give it. Within this separate write-up, you also will be discussing other elements of this assignment as instructed below.
Continue by recording your family's short-term, intermediate-term & long-term goals and the amount of money they have available to meet their short-term, intermediate-term & long-term goals in the Risk, Goals & Background Template worksheet. Next indicate, in the same worksheet, how willing and able your prototype is to spend time on investment and what the prototypes level of understanding of financial markets is. In your separate word document, briefly discuss your answers to these questions.
Continue completing your “Risk, Goals & Background” worksheet by identifying your prototype's main wage earner's expected Real Rate of Return on human capital by hyperlinking to the Mean Rate of Return you calculated in Assignment #3 from your prototype’s career cash flows. You need to adjust the Mean Rate of Return in Assignment 3 for the expected inflation rate during her/his career (2.5% is a reasonable estimate of inflation over the 20-40 years of typical careers). Fill in Lines 40-42 in the worksheet. Next fill in your prototype’s Expected Risk (line 43) by hyperlinking to the Standard Deviation that you calculated in assignment #3 using the Monetary Holding Period Rates of Retun. – refer back to our Human Capital Template for Sebastian. Lines 40-43 represent your estimates of the risk and return for your prototype’s human capital. You may want to adjust these returns by using the information in the article by Grabel and McGill.
You may be able to find a specialized data base for your prototypes occupation, that will provide you with a better measure of risk and returns. For example, we used AAUP findings to calculate the growth in real earnings (return to human capital) and volatility of earnings (standard deviation of earnings) for university teachers. Table A-2, p.25, of the article linked here gives some evidence regarding the volatility of earnings by occupation. The table contains high and low earnings (you can calculate the range from this) and the ratio of the 90th percentile of earnings to the 10th percentile of earnings ("National p90/10 ratio" ). Either of these can be used as a measure of volatility.
In your write up for this assignment, briefly explain how you obtained your estimate of the risk and real return to your prototype's human capital.
Complete the lines under “Real Estate Exposure & Geographic Locations” in the “Risk, Goals & Background” worksheet, including the geographic location where the prototype lives and location of any real estate that the prototype owns (add lines as necessary). You will have to derive the current market value of your prototype’s home (if owned), which you can do using the House Price Calculator found in the Office of Federal Housing Enterprise Oversight (OFHEO) website at: http://www.ofheo.gov/. It’s best to access this site in Firefox and not Internet Explorer. At the home page, place your curser on the “House Price Index” box at the top, and then click on “House Price Calculator”. To derive your house’s current market value, you will need to identify the year the home was purchased, and the purchase price paid.
Returning to the “Risk, Goals & Background” worksheet, you also will have to identify the current outstanding balance of the mortgage loan (i.e., the remaining principal outstanding) on your prototype’s home. You should use the Mortgage & Loan Examples spreadsheet (revised 10-26-08) and found in the Purchasing II presentation folder in the First Class conference. Finally, explain in your write-up how the locations of the prototype’s job and real estate might affect the family's choice of financial assets (e.g., a family working in the finance industry in NYC might not want to own a home in NYC).
Presentation & Financial Advisor Work
Email Econ223-Ask Ann & Saundra by 5PM on November 4 at the latest to request the presenter or Financial Advisor role for this week. Your presentation will be on November 11 . If we do not have a volunteer presenter & Financial Advisor by 5PM on November 4 we will assign students to presenter & advisor roles.
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© Ann Dryden Witte 2006
