Mock Exam - Afternoon - Q24 achieve, question, important, average

soverby

Hello,
Spoiler alert for anyone who hasn’t taken the mock exam yet.
Can someone please shed some light on Mock Exam - Afternoon - Q24? It seems to me that both A and C could be valid answers for this question. The vignette states that “The portfolio’s total pre-tax real return should achieve an average in excess of 7%…” The question asks which is least likely important for portfolio manager. The options are (A) tax rates, (B) Inflation levels, and (C) Benchmark returns. The correct answer according to the exam is (C), and the reasoning makes sense. Since there is a stated absolute target, it renders benchmark returns obsolete. However, the answer explanation states “Huntley has stated his target real, after-tax return in terms of a 7% absolute amount. The question mentioned pre-tax and the answer mentions after-tax. In my opinion, if the portfolio return objective is based on pre-tax, tax rates should not be a concern to the manager. This is implicitly assuming that tax rates is referring to any capital gains/dividend taxes to the family, and not tax rates and how they may impact returns at corporate level.

hardwork24

I am not going to get to this until May….may be someone else can help.