Roseanne's Choice

Roseanne is a 35 year-old mother living in a mid-western town. Her husband works in a factory, but is laid off about 20% of the time. She has three children -- a daughter and son who live at home and another daughter who is away at school. Roseanne is an entrepreneur. She and her sister opened a small lunch counter two years ago, and have experienced some success. In fact, she has been able to save $24,000 over the past two years. Her current after-tax income is $40,000. Assume if necessary, that she effectively has a 10% tax rate.

Her restaurant business does well when times are bad and not quite as well when times are good. The inexpensive meals are a substitute for richer, more costly dining. The business may or may not grow, but every year, Roseanne figures that her income has roughly a 1/6 chance of increasing by $10,000 and a 1/6 chance of decreasing by $10,000. If she had to, she figures she could sell her share in the restaurant, but she does not know how much it would bring, and working as a waitress she could expect to earn $16,000 per year after-tax, if she suddenly lost her share.

Roseanne feels she can save about $20,000/ year when her husband is working, and must spend $10,000 per year in savings when he is not. Her middle daughter has a scholarship which will last for the next four years of college, but her additional college expenses represent $2,000 of Roseanne's after-tax income. She and her husband own their modest home, but they have a mortgage that costs $4,000/year in after-tax (and after deductions and property) income.

To do:

1. Develop a mutual fund strategy for the family. What types of funds are appropriate and why?

2. Choose a set of 4 to 6 funds from the data sources available, and explain your choice. Calculate and report the risk and return characterstics of the funds.