episode 03 exercise 02

Part 2

Help Maria's parents by developing the following chart. This chart will give them a sense of the alternatives they face and the expected results of the investment strategy they will eventually adopt. Calculate the expected value of the retirement fund for 10, 12, and 15 years for each of the three strategies (i.e., investing in CDs, AAA bonds, and stocks). Use your answers to fill in the chart below and then check your solutions by clicking on "How did I do?"

Future Value Retirement Fund $80,000 Initial Value, $250 Contribution at the end of Each Month
Investment	Expected Return	10 Years	12 Years	15 Years
CDs	6%
AAA	8%
Stocks	12%

What lessons should Maria's parents draw from this chart about the relationship between time, value, and type of investment?

Now let's see what happens if Maria's parents increase their monthly saving from $250 to $350. Complete the chart below in the same fashion as you did in the first problem, clicking the "How did I do?" button to check you work.

Future Value Retirement Fund $80,000 Initial Value, $350 Contribution at the end of Each Month
Investment	Expected Return	10 Years	12 Years	15 Years
CDs	6%
AAA	8%
Stocks	12%

In 10 years, the CDs, which return 6%, will produce $186,521 if Maria's parents invest $250 each month, and $202,910 if they invest $350 each month. (Note: This includes the future value of the $80,000 already accumulated by Maria's parents.) Since these are 10-year results, they reflect 120 deposits. This means that with the $350/month strategy, a total of $12,000 more was deposited than with the $250 strategy. Why, then, do the final numbers differ by $16,389 ($202,910 - $186,521)?

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