Assuming that the interaffiliate cash flows are uncorrelated with one another,calculate the minimum cash balance to have if the firm follows a conservative policy of having three standard deviations of cash for precautionary purposes. $$\begin{array} { l c c }
\text { Affiliate } & \begin{array} { r }
\text { Expected } \
\text { Transactions }
\end{array} & \begin{array} { c }
\text { Standard } \
\text { Deviation }
\end{array} \
\hline \text { U.S. } & \$ 100,000 & \$ 40,000 \
\text { Canada } & \$ 150,000 & \$ 60,000 \
\text { Mexico } & \$ 175,000 & \$ 30,000 \
\text { Chile } & \$ 200,000 & \$ 70,000
\end{array}$$

Question

Assuming that the interaffiliate cash flows are uncorrelated with one another,calculate the minimum cash balance to have if the firm follows a conservative policy of having three standard deviations of cash for precautionary purposes. $$\begin{array} { l c c } 
\text { Affiliate } & \begin{array} { r } 
\text { Expected } \
\text { Transactions }
\end{array} & \begin{array} { c } 
\text { Standard } \
\text { Deviation }
\end{array} \
\hline \text { U.S. } & \$ 100,000 & \$ 40,000 \
\text { Canada } & \$ 150,000 & \$ 60,000 \
\text { Mexico } & \$ 175,000 & \$ 30,000 \
\text { Chile } & \$ 200,000 & \$ 70,000
\end{array}$$

Quizplus · Accepted Answer

The minimum cash balance is calculated by finding the square root of the sum of the squares of the standard deviations, then multiplying by three for the conservative policy. The calculation is: $\sqrt{40,000^2 + 60,000^2 + 30,000^2 + 70,000^2} \times 3 = 314,642.65$.

Assuming That the Interaffiliate Cash Flows Are Uncorrelated with One