Investment Presentation By Professor David M. Sinow University of Illinois September 11, 2007

Investment Presentation

By

Professor David M. Sinow

University of Illinois

September 11, 2007

Investing Overview

What makes a difference when you invest?

Equities vs. Fixed IncomeVolatility Is Your EnemyLonger Term Fixed Income Investments Are Too RiskyThree Factor ModelAsset Allocation: The Real Key to InvestingDave’s Couch Potato Portfolio

Asset Class Performance 1925-1996

Volatility is Your Enemy!!!!

Assume I invest $100.00 for one year & earn 0% at the end of year 1. Assume that the following year I invest the $100.00 and earn 0% again. My average return is 0%.

Now Assume that you invest $100.00 for one year and earn 50% at the end of year 1. Assume the following year you invest $150.00 and your second year rate of return is a –50%.

We each had an average rate of return of 0% over the two year period.

$150

$75

$0

$100

$200

Yr 1 Yr 2

But……….Who has more money at the end of the 2 years????

A) Me

B) You

MORAL OF THE STORY: VOLATILITY KILLS PORTFOLIOS IN DOWN YEARS—BECAUSE YOU LOSE A GREATER PERCENTAGE OF YOUR GAINS FROM PREVIOUS YEARS!!!!

Risk/Reward: Does it Pay to Extend Maturities? 1964-1994

0

2

4

6

8

10

12

14

1 Mo. 6 Mo. 1 Yr. 5 Yrs. 20 Yrs.Maturity

AnnualizedReturn

AnnualizedStandardDeviation

(%)

Annualized Return (%)

6.56 7.43 7.53 7.70 6.89

Annualized Standard Deviation

1.32 1.64 2.16 6.68 11.50

Long maturity instruments are riskier.

Returns for longer maturity instruments are not consistently greater.

Alternative strategies are needed to enhance returns.

Three Elements That Determine the Majority of an Equity Fund’s Expected Return

Size FactorSmall Stocks Minus Large Stocks

Market FactorAll-Equity Universe Minus T-bills

Style Factor“Out-of-Favor Companies

Minus “Glamour” Companies

AverageAnnualReturns1964-1996

5.86%

3.58%

5.13%

Porfolio #1 – A Basic Portfolio Passively Invested

Expected Return Standard Deviation

Portfolio #1 13.6% 10.3

60% S&P 500 Index

40% Lehman Gov/Corp. Index

Porfolio #2 – A Basic Portfolio Substituting Short-Term Fixed Income for Long-Term Fixed Income

Expected Return Standard Deviation

Portfolio #1 13.6% 10.3

Portfolio #2 13.3% 8.6

60% S&P 500 Index

40% 1-yr Fixed Income

Porfolio #3 – A Basic Portfolio Balancing Equities, S & P, and US Small Cap Index

Expected Return Standard Deviation

Portfolio #1 13.6% 10.3

Portfolio #2 13.3% 8.6

Portfolio #3 14.9% 9.9

30% S&P 500 Index

40% 1-yr Fixed Income

30%Small Cap

Porfolio #4 – A Basic Portfolio Balancing US Small Cap Value, US Small Cap, US Large Value, and S&P 500 Index

Expected Return Standard Deviation

Portfolio #1 13.6% 10.3

Portfolio #2 13.3% 8.6

Portfolio #3 14.9% 9.9

Portfolio #4 15.7% 9.8

15% S&P 500 Index

15% US LargeCo. Value

40% 1-yr FixedInc.

15% Small Cap

15%Small Cap Value

Porfolio #5 – A Basic Portfolio Adding International Diversification

Expected Return Standard Deviation

Portfolio #1 13.6% 10.3

Portfolio #2 13.3% 8.6

Portfolio #3 14.9% 9.9

Portfolio #4 15.7% 9.8

Portfolio #5 16.6% 9.1

7.5% S&P 500

40% 1-yr Fixed Inc

15% Int’l Small Value

7.5% US Large Co. Value

7.5% US Small Cap

15% Int’l Large Value

7.5% US Small Cap Value

DAVE’S COUCH POTATO PORTFOLIO

Asset Class Percentage Invested

1 S&P 500 10%

2 US Large Value 16.5%

3 US Small Cap 10%

4 US Small Cap Value 16.5%

5 US Mid-Caps 10%

6 US REIT 7%

7 Total International 25%

8 Emerging Markets 5%

Total 100%