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This article was posted on June 1, 1999.
Effective Diversification Calculation
Motley Fool Rule Maker |
| No. |
Security |
Current
Value |
(V)
Relative
Value |
(R)
Beta |
(V x R)^2 |
Comments |
| 1 |
VMMXX |
$23,000 |
0.2300 |
0.05 |
0.00013 |
Vanguard Money Market Fund |
| 2 |
CHV |
$3,300 |
0.0330 |
0.67 |
0.000489 |
Chevron |
| 3 |
XON |
$3,600 |
0.0360 |
0.75 |
0.000729 |
Exxon |
| 4 |
EK |
$3,600 |
0.0360 |
0.50 |
0.000324 |
Eastman Kodak |
| 5 |
GM |
$3,300 |
0.0330 |
0.88 |
0.000843 |
General Motors |
| 6 |
CSCO |
$9,200 |
0.0920 |
1.50 |
0.019044 |
Cisco |
| 7 |
MSFT |
$8,700 |
0.0870 |
1.10 |
0.009158 |
Microsoft |
| 8 |
GAP |
$7,800 |
0.0780 |
1.35 |
0.011088 |
Gap Stores |
| 9 |
PFE |
$6,000 |
0.0600 |
1.05 |
0.003969 |
Pfizer |
| 10 |
INTC |
$6,000 |
0.0600 |
1.00 |
0.003600 |
Intel |
| 11 |
YHOO |
$5,900 |
0.0590 |
1.75 |
0.010661 |
Yahoo! |
| 12 |
TROW |
$5,300 |
0.0530 |
1.60 |
0.007191 |
T.Rowe Price |
| 13 |
AXP |
$5,100 |
0.0510 |
1.35 |
0.004740 |
Amer. Express |
| 14 |
SGP |
$5,000 |
0.0500 |
1.15 |
0.003306 |
Schering-Plough |
| 15 |
KO |
$4,200 |
0.0420 |
1.10 |
0.002134 |
Coca-Cola |
| - |
Total |
$100,000 |
1.0000 |
- |
0.07741 |
= Sum(V x R)^2 |
Effective Diversification, D = 1/(SUM (V x R)^2) = 1/(0.07741) = 12.9
Non-market Risk = 1/(SQRT (D)) = 1/(SQRT 12.9) = 27.82%
100% Safe Withdrawal Rate = 2.98%
95% Safe Withdrawal Rate = 3.73%
90% Safe Withdrawal Rate = 4.05%
Note (1): Safe withdrawal rates based on 40 year pay out period.
Note (2): The $77,000 stock portfolio is composed of the Motley Fool Rule Maker stocks in thier approximate percentage of portfolio on May 12, 1999.
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