Easily and rationally determining the total quantity of an asset to acquire, given

finite wealth, the price of the asset, the expected return, and brokerage fees and
taxes.

By: James F. Huntington Jr.

ABSTRACT:
This small essay seeks to offer a new methodology for choosing the quantity of a single
asset to be purchased, taking into account the variables of the total amount of wealth to
be invested, the price of the asset, the expected rate of return of the asset, and the
brokerage fees associated with the purchase and potential future sale of the asset. This
small essay intends to simplify the process of choosing the quantity to be purchased of
any single asset, which may or may not be part of a larger portfolio.

Key Words: Assets, Quantity, Investing, Portfolio, Broker

KEY: Jimmy you should redo your key and make it consistent.

Profit is a function of Wealth available to invest in the asset, the price of the asset, and
the expected rate of return of the asset …

(1) π = f(W, Pa , y%)

… because W, Pa , and y% determine the N of the asset to be acquired.

We shall start with answering the following basic question. How much of a single asset
should be purchased, given a certain known amount brokerage fees and/or government
taxes associated with the purchase and sale of an asset?

Total fees (Tfees) = Fee of purchase + Fee of sale + Any other associated fees or taxes).

To ensure that one does not accrue a loss upon purchasing assets due to the fees
associated with the purchase and potential sale of that asset, we shall set the following
rule;

!!""#
profit equals zero (π=0) when (A2-A1) = !!
So,

!!""#
(2) N0 = (!!!!!)

When deciding the number of assets to acquire one must estimate what the future value
of the asset will be (A2). This future value can be estimated by considering the expected
rate of return of the asset as demonstrated by !%. Thus, given a present value of an
asset A1, we can estimate its future value given !% using the formula …

(3) A2 ≈ !!   1 + !%

! !!
!
!!!(  !!  !  !)
remembering that !% = !
!

Thus the difference between (A2-A1) can now be estimated via [!! 1 + !% −   !!   ].

So, to know the number (n) of assets one should buy to have zero profit (π=0), given the
Tfees of the broker, one should use the revised formula (2).

!!""#
(4) N0 = [! !!!% !  !!   ].
=π=0
!

According to the formula offered in (4) we see the number of a single asset to acquire
for zero profit. Whether this number can in fact be purchased, or not, depends on the
total wealth available to be allocated for the purchase of this asset (W).

We shall then establish a formula to determine the total number of the asset that can be
acquired given allocated wealth. This shall be defined as the total wealth available to be
allocated for the purchase of this asset divided by the price of that asset at the time of
purchase.
!
(5) NT = !!"

It shall then be important to define some relationships, to analyze these relationships,

and finally to establish rules based on such relationships.

(6) if

N0 > NT = = one cannot buy the asset without a loss

N0 < NT = = one can buy the asset without a loss

We shall next determine if our amount of available wealth that can be applied (NT) is
sufficient to allow for profits given the expected return of the asset (y%). We may state
that, if the expected rate of return of the asset is low, and the fee to NT ratio requires a
large yield, then the investment is not likely to be profitable. The inverse is also true. If
the asset has a high expected rate of return, and if the fee to NT ratio is small, then the
investment is likely to be profitable. This required minimum yield, if you will, shall be
called the minimum required return (y%w). We may say that y%w= f(W, Pa). It is a
function of the wealth to be allocated and the price of the asset, or rather, NT. The
following formula outlines the minimum required return (of the asset) required for
breaking even, given a finite amount of wealth to be applied in function of the asset
price.
 !"##$
!
!!
(7) y%w = !!

It shall then be important to define some relationships, to analyze these relationships,

and finally to establish rules based on such relationships.

(8) if

y%w > y% = one cannot buy the asset without an expected loss
y%w < y% = one can buy the asset with an expected gain

Finally, in the effort to easily and rationally determining the total quantity of an asset to
acquire, given finite wealth, the price of the asset, the expected return, and brokerage
fees and taxes, we shall consider one last point. Recognizing that formula (1) is indeed
true, that profit is a function of the total wealth available to invest in the asset, the price
of the asset, and the expected rate of return of the asset [π = f(W, Pa , y%)], we shall
then examine how far we are able to deviate from N0 given our available wealth. This
relationship shall be given in terms of a percentage. We may wish to define this margin
(πmar%) on our investment. The following formula shows the limit of this margin.
!
 !  !!
!!
(9) πmar% = !!

We are now closer to determining the final quantity of the asset to be acquired. We may
say that this quantity is a number in function of the previously established margin
(πmar%). Thus, !!!"#% , the number of the asset to acquire at the above defined margin
will be a function of N0 and πmar%. This shall be stated as:

(10) !!!"#% = N0 (1+ πmar%)

This can be written more thoroughly as:

!
 !  !!
!!
(11) !!!"#% = N0 {1+ !!
}

Finally, we may determine the net profit of the investment as being:

(12) π = (!!!"#% x !!   ) - (!!!"#% x !!   )

To conclude our analysis, so that we may easily and rationally determine the total
quantity of an asset to acquire, we shall establish a guide of steps to be taken. First, one
must ask oneself the following questions:

1) How much wealth (W) does one dispose of for investment in a single asset?
2) What is the price of the asset (!!! )?
3) What are the brokerage and tax fees (Tfees ) associated with the purchase and
sale of an asset?
4) What is the expected rate of return for the asset (!%)?

Assuming one has already answered all of the above listed questions, the following
steps detail how one may easily and rationally determine the total quantity of an asset to
acquire, given finite wealth, the price of the asset, the expected return, and the
associated brokerage fees and taxes.

Step 1: Determine the number to be invested for zero gains zero losses (N0).

!!""#
(4) N0 = [!
! !!!% !  !!   ].

Step 2: Verify that NT > N0.

! !!""#
(5) NT = !!" > (4) N0 = [! !!!% !  !!   ].
!

Step 3: Verify that y%w < y%.

!"##$ !!
! ! !
!! !!!(  !!  !  !)
(7) y%w = !!
< (given) !% = !
!

Step 4: Calculate the actual number of the asset able to be acquired.

!
 !  !!
!!
(11) !!!"#% = N0 {1+ !!
}

Step 5: Calculate the profit of the investment.

(12) π = (!!!"#% x !!   ) - (!!!"#% x !!   )

For future study I recommend that formulas for determining Tfees be developed that put
Tfees as a function of π, given than in most countries’ taxes are calculated upon the
amount of profit earned. By putting Tfee = f(π) the calculations become circular. Also, the
concept of expected rate of return should be developed further to include analysis of
successive losses and/or gains in time, and patterns should be identified that help
predict whether an asset will increase or decrease in price. Lastly, a geometric mean
factor should be developed to answer the question of how, and how much an asset
responds to positive and/or negative news in the media, as well as the quantity of such
news. This, combined with already existing knowledge on the subject should help
reduce the risk associated with investing, and increase rationality in investing.