Thursday, April 10, 2008

Borrowing cheaply to fund investments - Pt. 3

The final piece of analysis for my cheap loan for investment idea is to consider a classic value-at-risk model. What is the worst case scenario, and could I handle it?

After paying out the 0.50% monthly interest, assuming the very worst, I would need a 28.8% return in the last month to have enough money to pay back the loan + fees and break even.

I think I can accept that. If I become super risk-adverse, I could generate about 2-3% return per month with the possibility of needing to shell out $2,000 at the end of 3 years to pay back the loan.

2 comments:

Anonymous said...

Please keep us posted on your progress / results... Very interesting. Any chance you could hint to what kinds of investments you will be making?

Finance Guy said...

That will be part 4. Stay tuned. My initial thoughts are to split the borrowed money in half, placing 50% into a high-yield CD to guarantee some amount of money, and placing the other 50% into a combination of ETFs and higher-risk option trades.

ETFs such as financials and technology, which have been taking beatings the first quarter of the year, seem poised to bounce back by the end of summer.