Re: compound interest variant - problem

On May 4, 12:51 pm, conrad <con...@xxxxxxxxxx> wrote:
If I have multiple mutual funds
each earning at different interest rates
and investments in multiple stocks
each earning at different interest
rates, then what is the ideal method
of finding what you earn, compounded
annually, with additional annual
contributions?

What do you mean by "...what you earn, compounded annually..."? Each
separate investment j earned a certain interest amount $r(j) last
year, so your total interest dollars earned last year is E =
sum{r(j)]. You can do this calculation year-by-year, to get a series
of total $ earnings: E(1) in year 1, E(2) in year 2, etc. Do you now
want to compute a net present value (or future value) of the income
stream E(1), E(2), ... ? If so, how would you choose the appropriate
"rate of interest" to use in the computation? Corporations often try
to approximate such calculations by using a 'cost of capital' figure
in their present worth (or future worth) calculations, but there is
widespread disagreement in the finance literature about how
appropriate that method actually is. In any case, the nominal cost of
capital figure would be some weighted combination of the interest on
debt and equity; see, eg., http://en.wikipedia.org/wiki/Cost_of_capital
or http://www.valuebasedmanagement.net/methods_wacc.html .
Of course, for an individual household these methods may not be
relevant.

R.G. Vickson
Adjunct Professor
Department of Management Sciences
University of Waterloo


--
conrad

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