Question: Giacomo Poretti lives in Milano with his wife, Chiara, in a house that they jointly own. He has worked as a professor at a well-known university for more than 28 years, and Chiara works as a publisher for Mondadori, where she is the head of the Italian history division. Both of them have above average wages, and both are approaching retirement age. Their two children have moved to Torino and are financially independent from their parents. Both Giacomo and Chiara have been saving a specific amount every month in a savings account. These savings currently amount to the value of almost €80,000 (Euro). Giacomo has calculated that, upon retirement, he will receive €1,500 a month from the pension plan, and Chiara €1,300, which is more than enough to cover their living expenses. Giacomo and Chiara love traveling and would like to take trips to exotic locations, but they haven't been able to do so because they have been very busy at work. Since their saving accounts are yielding almost zero percent interest, as they approach retirement, they have decided that they want to invest their savings into a more profitable instrument that also ensures a continuous inflow of money for them to spend on vacations. They plan to take a vacation trip every two months, and each trip will cost them approximately €1,500. After talking to a financial consultant, they decide that they want to invest into a mutual fund.

a. Given the financial situation of Giacomo and Chiara and their objectives, what kind of mutual funds do you think the consultant will advise them to invest into?

b. How would the answer in part a change if Giacomo and Chiara had a payment of €20,000 for educating their youngest son coming up in six months?

c. If Giacomo and Chiara were very different investors-in their forties, both of them risktakers who like to gamble and invest in some new risky companies, and with no plan to take a vacation every two months-how would the answer in part a change?

d. Assume that Giacomo and Chiara invest into a high-yield bond mutual fund that earns 6% annually from interest income and capital gains and that they need to receive €6,000 a year for vacations, what would be the size of their investment account three years from now?