Please Help.
Suppose that a portfolio consists of 3 securities (1,2,3). Expected rates of return are: 5%, 9%, 14% of the 3 securities, respectively.
(1) Find the expected rate of return on each of the two portfolios of these securities:
Portfolio A where w1=w2=w3
Portfolio B where w1=w2 and w2=2w3
(I solved this)
(2) Assume both portfolios have the same risk (10%) which one would you choose?
(I solved this)
(3) Assume your portfolio amount or wealth is $10000, how much have you invested in each of the three securities in your chosen portfolio.
(I solved this)
(4) Find the expected total cash flow and expected net cash flow of the portfolio at the end of the period.
(Don't have formula for this, cannot solve. If someone can help me out, please lead me in the right direction)
To calculate the expected total cash flow and expected net cash flow of the portfolio at the end of the period, you will need to consider the initial investments in each security and their respective expected rates of return.
Here's how you can proceed:
Step 1: Determine the initial investments in each security.
You mentioned that you have solved part (3) and found out how much you have invested in each of the three securities in your chosen portfolio. Let's say the amounts are $x, $y, and $z for Security 1, Security 2, and Security 3, respectively.
Step 2: Calculate the expected cash flow for each security.
The expected cash flow for each security can be obtained by multiplying the initial investment by the expected rate of return. For Security 1, the expected cash flow would be x * 5% = 0.05x. Similarly, for Security 2 and Security 3, the expected cash flow would be y * 9% = 0.09y and z * 14% = 0.14z, respectively.
Step 3: Calculate the expected total cash flow.
The expected total cash flow is simply the sum of the expected cash flows of all three securities. So, you would add 0.05x + 0.09y + 0.14z.
Step 4: Calculate the expected net cash flow.
To determine the expected net cash flow, you would subtract the total initial investment from the expected total cash flow. Let's assume the total initial investment is denoted by T and the expected net cash flow is denoted by N. Therefore, N = (0.05x + 0.09y + 0.14z) - T.
Remember to use the values you obtained in part (3) for the initial investments in each security when performing these calculations.
This approach considers the expected cash flows and net cash flows for individual securities in the portfolio.
To find the expected total cash flow and expected net cash flow of the portfolio at the end of the period, you need to calculate the total cash flow and net cash flow for each security in the portfolio and then sum them up.
The total cash flow for a security can be calculated by multiplying the expected rate of return of the security by the amount invested in that security. For example, if you have invested $5000 in security 1 with an expected rate of return of 5%, the total cash flow for security 1 would be $5000 * 5% = $250.
The net cash flow for a security can be calculated by subtracting the initial investment from the total cash flow. For example, if you initially invested $5000 in security 1 and the total cash flow for security 1 is $250, the net cash flow for security 1 would be $250 - $5000 = -$4750.
You can repeat this calculation for each security in your chosen portfolio and then sum up the total cash flows and net cash flows for the entire portfolio.
For instance, let's assume you have invested $3000 in security 1, $4000 in security 2, and $3000 in security 3. From your previous calculations, you have found that the expected rates of return for these securities are 5%, 9%, and 14% respectively.
For security 1:
The total cash flow would be $3000 * 5% = $150
The net cash flow would be $150 - $3000 = -$2850
For security 2:
The total cash flow would be $4000 * 9% = $360
The net cash flow would be $360 - $4000 = -$3640
For security 3:
The total cash flow would be $3000 * 14% = $420
The net cash flow would be $420 - $3000 = -$2580
To find the expected total cash flow of the portfolio, you simply sum up the total cash flows for each security:
Expected Total Cash Flow = $150 + $360 + $420 = $930
To find the expected net cash flow of the portfolio, you sum up the net cash flows for each security:
Expected Net Cash Flow = -$2850 + -$3640 + -$2580 = -$9070
Therefore, the expected total cash flow of the portfolio at the end of the period is $930, and the expected net cash flow is -$9070.