Suppose you have just received a $1000 bonus at your job. Rather than waste the money on frivolous items, you decide to invest the money so that you can apply it toward the purchase of a home one day. Many investment options are available. Your family and friends, who have some experience in investing, recommend mutual funds. Which mutual funds should you choose? Thousands of mutual funds are available to invest in. According to Wikipedia, “a mutual fund is a professionally managed type of collective investment scheme that pools money from many investors and invests typically in investment securities (stocks, bonds, and so on).”
(a) Research the various classifications (Growth, Value, and so on) of mutual funds. Decide on a particular mutual fund classification.
(b) Go to www.morningstar.com. Morningstar is a mutual fund rating agency that ranks mutual funds according to a star rating. The 5-star rating system divides the mutual funds into percentile classes. A mutual fund with a five-star rating is in the top 20% of all mutual funds in the category. Choose a mutual fund that has at least a four-star rating and has been around for at least 5 years.
(c) Research the historical monthly rates of return of the mutual fund you selected in part (b). You will use two criteria in selecting a mutual fund. First, the mean rate of return of the fund over the past 48 months must exceed 7%. Second, the proportion of the past 48 months where the rate of return is positive must exceed 0.7. Treat the selected months as a random sample of rates of return. Conduct the appropriate tests to see if the mutual fund you selected meets your criteria.

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