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IPS questions with asset allocations

1) if you are asked to choose best allocation given a return requirement, i assume that the return you use should be pretax and real, since that is how returns are presented–is that right?
2) when picking a portfolio to satisfy liquidity needs are the only instruments for our purposes that we should look at are money markets and cash (i.e. do we assume treasuries and other short term bonds provide no liquidity)?

yes and yes

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ok thought sso too but in 2007 exam 2C, they say that the return is insufficient and they use the nominal pretax return of 7.46% to compare to allocation of 7.1%

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I amend my answer to 1.
Actually I think returns are always presented pre-tax and nominal in the asset allocation portfolios

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I don’t have the 2007 exam in front of me, and i’m feeling under-prepared so take this with a grain of salt. My understanding is that the client’s required rate of return is what takes taxes and inflation into account. Then its just a matter of picking the allocation that meets the required return. Nothing needs to be done to the returns listed in the table.
Example:
Say a guy has $1 million, and spent the $50,000 of after-tax portfolio income he received last year and had no other income. He is taxed at 30% and expects inflation of 3%. This year, he needs a pre-tax return of 7.36% to meet his spending. (50K*1.03)/(1-0.3), not 5%. If you pick an asset allocation with a return lower than 7.36%, then it won’t meet his spending requirement on an after tax and inflation adjusted basis.

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