Use the total Portfolio approach to analyze following (As in Homeworks Section 6

Question

Use the total Portfolio approach to analyze following (As in Homeworks Section 6-7) the future worth will be used. A total of 200,000 is available to invest. A Bank Saving account which earns 6% . available. It can be entered and exited at any time. A C O Is available for 12 % per year for 5 years. It can only be available at t=0 and exited at t = 5 years Three five year choices are available in addition to solely the C.O. Show which portfolio choice has the best Future Value and show analysis details.

Explanation / Answer

Return on 1st investment

Let return be r

60000 = 80000/(1+r) + 100000/(1+r)^2 + 120000/(1+r)^3+ 90000/(1+r)^4 +10000/(1+r)^5

r=145.20%

Return on 2nd investment

Let return be r

100000 = 40000/(1+r) + 40000/(1+r)^2 + 40000/(1+r)^3+ 40000/(1+r)^4 +40000/(1+r)^5+20000/(1+r)^2 =31.39%

Return on 3rd investment

Let return be r

130000 = 60000/(1+r) + 80000/(1+r)^2 + 100000/(1+r)^3+ 120000/(1+r)^4 +140000/(1+r)^5+30000/(1+r)^2 =58.89%

Project 1 has highest return followed by III and then II

Portfolio choice 1 - 130000 in Investment III + 60000 in Investment I + 10,000 in CD

Portfolio choice 2 - 200000 in Investment II

Portfolio Choice 3 - 180,000 in Investment I + 20,000 in CD

Best option is t invest  180,000 in Investment I + 20,000 in CD

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