标题: 2008 AM Que 1 vs EOC Reading 14 # 13 [打印本页] 作者: domani 时间: 2013-4-22 14:47 标题: 2008 AM Que 1 vs EOC Reading 14 # 13
2008 ques: After tax Salary is given & salaries & expenses are expected to increase at inflation rate
Ans: Inflation rate is considered while calculating nominal return
EOC # 13: After tax sal increase will offeset any future increase in living expenses
Ans: Doest not incorporate infaltion. Note says: need not consider inflation作者: cchang 时间: 2013-4-22 14:48
I would have to look at the two other than this vague summary. But, in general, even if both salary and expenses grow at inflation, therefore creating a constant real inflow/outflow each year, you still need to protect the portfolios value from inflation so it should be added (or multiplied) to the return requirement.
E.G. expenses is one area in which inflation needs to be considered, the portfolio is the other (and larger) part.作者: brk1yn 时间: 2013-4-22 14:49
Actually I was not looking at it with that much granularity janak, but that is a very interesting point.
TBH when i see the words “preserve real value”, “inflation adjusted”, or “grows with inflation”…. or basically anything that even looks similar to these phrases, i always add in inflation. That is why i missed the 2008 morning where it says “salary and expenses are a wash”. I am not 100% sure when they want to add it and when they don’t, but I think between Janakisri’s comment and my halfwit attempt at an answer, we may be getting closer.
I think Janak may be right on with regards to “both grow at inflation” versus “salary and expense growth offset eachother” – the former requiring including inflation in the return, the latter not.
I’ll defer to smarter individuals than myself to put the nail in this coffin.作者: soverby 时间: 2013-4-22 14:50
rahuls wrote:
I was so baffled after reviewing mine answers for 2008, srry for being vague. 2008 was a tough & a lengthy one.
I agree, for me the 2008 is the hardest exam i’ve taken yet. It was just brutal.作者: Valores 时间: 2013-4-22 14:51
So there are three statement or rather four i could collect so far. While formulating return objective whether to include inflation or not will depend on words. If it says
1) After tax salary increases will offset any future increase in living expeneses - dont consider inflation
2) Salaries & expenses are expected to increase at inflation rate - consider inflation
3) Future Salary increases are expected to match any increases in living expenses on a pre tax basis - Dont consider infaltion
4) Terminal value at the end of horizon is given - inflation is built in (as CPK mentioned in other posts) so dont consider.
Right?作者: sharksfan 时间: 2013-4-22 14:52
Good summary , thanks. Sounds right on all of them作者: towardsutopia21 时间: 2013-4-22 14:52
thanks Rahuls….#4 is bothering me lol I wonder if there is an example where we should included inflation…作者: MiniMe7 时间: 2013-4-22 14:53
#3 infered from 2010 AM ques 1. There is no inflation number given in vignette. They say it is expected to match. Though we have not used this since #4 applied while calculating return. TVM was given to purchase the annuity.作者: SkipE99 时间: 2013-4-22 14:54
To me “match” is the same as “offset” , so 1 and 3 are same作者: LokiDog2 时间: 2013-4-22 14:54
Still not convinced on that Janak…. offset is more clear cut, expenses and salary are neutralized in prepetuity. “match” could mean matchin percentage increase, which would make it the same as #2 as I mentioned. Matching dollar increase would be offsetting.
And the inference on the 2010 AM Q is tricky because that involves a TVM calc as rahuls said, so we cannot be sure that #3 infers not adding inflation.
This is still a grey area for me though I feel I am closer. The uncertainty around inflation adjustment and also when to include charitable gifts/bequests into return calculations are the two parts of individual IPS that really confuse me. Text says gifts/bequests are “desired” and not “required” so should not be part of required return. However I saw a past morning test that did just the opposite. I may have to reach out to CFAI on these. Anyone know the general email address for this type of question and about how long it usually takes to get a reply?作者: leadcfa 时间: 2013-4-22 14:55
send an email to info@cfainstitute.org
They immediately give you a response saying 1-2 business days. And they are usually good about curriculum book related errata / doubts.
I am however not sure if they will provide you with an answer there.
If you had the question in mind - post it here … so we can all try to arrive at a resolution together / with the help of other outside resources. I know a lot of folks are doing classes and could ask the Professor (either live or during chat sessions) and so on.作者: Bluetick1010 时间: 2013-4-22 14:55
janakisri wrote:
I think the key here is that 2008 q says salary and expense rise at the rate of inflation .
But EOC #13 says salary growth offsets living expense growth .
offset is a bigger deal while growing linearly may not offset . For example if living expense is 100k and salary is 80k then gap is 20k in the beginning. If both go up by 5% ( i.e. no offset ) then the gap between living and salary will go up by 5% , so that the portfolio will begin to erode. So we must calculate a nominal rate of return as the current rate + 5% ( being inflation ) . The portfolio has to be the offset .
sorry to bring this back from the dead when we all thought it was resolved, but i just did the 2008 question today.
in 2008, the expenses = salary. it says “salaries just cover their living expenses”. so there is no gap. if expenses were 120K and salary was 119K, then fine, the gap increases each year. but theyre the same. so even in 300 years, they’ll both be equal if both grown at the same inflation rate.
i think the real key is that the maclin case does not desire to grow the portfolio at the inflation rate (no mention of preservation made, no inflation rate given). DO NOT ADD INFLATION.
the 2008 case part I explicitly says they want to maintain the portfolio value in real terms, and it is even listed in the formulation of the objective. ADD INFLATION.
in the 2008 case, in the second part, you dont add inflation. they have no real wealth preservation objectives. in that new paragraph, no mention is made of wealth preservation, and it is not included in the new formulation of the return objective. to me, this meant that real value does not need to be preserved. just get to a desired terminal value, like the maclin case. DO NOT ADD INFLATION.
in the 2007 case, they explicitly say they want to increase the portfolio with inflation. so you need one portion of your return to cover expenses and one portion to cover real welth preservation of the asset base. ADD INFLATION.
if this is correct (please correct me if u disagree), then i think there is something off with the way CFAI explains this in the answer key. in the maclin case and in 2008 part 2, they say that salary and expenses just offset. im not sure i understand this explanation. both salary and expenses offset in the 2008 question part 1, yet we still added inflation there. so to me, the key is wealth preservation vs. reaching a terminal value, not salary and expenses offsetting.作者: Gypsy 时间: 2013-4-22 14:56
TheShow…. totally agree with your assessment, and if it’s wrong I don’t know how to correct it anyhow. I also agree the CFAI answers are too surface level and inconsistent. I emailed them with multiple detailed questions over a month ago and never got a reply. I have had run-ins with them in the past and once you back them into a corner they just choose to not answer. How very “ethical” of them.作者: RobertA 时间: 2013-4-22 14:56
yea i mean i agree with all of the math and answers so i wouldnt say its wrong. they probably are just being very unclear/vague with the notes they have in both maclin and 2008 cases. ”salary/expense is a wash”–are you kidding me?作者: Analyze_This 时间: 2013-4-22 14:57
TheShow, theoretically for the maclin case, what has to happen for inflation adjustments to be made?
[1]Suppose expense/income do not offset and that expenses increase at inflation while income does not…would we multiply the expenses by (1+infl) in the CF section AND NOT add inflation in return requirement ?
[2]Suppose expenses/income do not offset and that expenses increase at inflation while income does not AND we want to preserve purchasing power…would we multiply the expenses by (1+infl) AND add inflation in return requirement?作者: smartpants 时间: 2013-4-22 14:57
Now that I think about it, the notes they put for the Maclin case and the 2008 case don’t address inflation of the portfolio whatsoever. The notes are not wrong–they just simply refer to the expenses/income rather than the tacking on of the inflation.
In the Maclin case, the note is just referring to why the annual salary and living expenses are not higher numbers.
In the 2008 case, the note is just referring to why the PMT function does not need any adjustment for living expenses–it’s because the salary covers it.
That’s all they are saying. In other words, they are stating the obvious to us (that salary = expenses and the return objective does not need to be increased to account for living expenses). And they are NOT making any reference whatsoever to the inflation rate that is to account for real portfolio growth, but that’s because it is unnecessary to add them in both places.
I think this is the answer to this problem and makes the 2007, two 2008, and Maclin returrn objectives agree. Not bad for three hours of brain torture.作者: maratikus 时间: 2013-4-22 14:58
Alladin wrote:
TheShow, theoretically for the maclin case, what has to happen for inflation adjustments to be made?
[1]Suppose expense/income do not offset and that expenses increase at inflation while income does not…would we multiply the expenses by (1+infl) in the CF section AND NOT add inflation in return requirement ?
[2]Suppose expenses/income do not offset and that expenses increase at inflation while income does not AND we want to preserve purchasing power…would we multiply the expenses by (1+infl) AND add inflation in return requirement?
My understanding is that you could not do a TVM calculation if the two did not offset precisely. Because, your PMT would be different each year and your calculator couldn’t handle that. You would need to use the CF function.
The trick to the 2007 case is that expenses were increasing with inflation each year, but there was NO SALARY. So the “gap” was not increasing at different amounts each year. It was increasing by a constant, steady rate of inflation. And this was accounting for by adding inflation at the end of the return.作者: dcfox83 时间: 2013-4-22 14:59
i am learning more here than in the curriculum 作者: atate2007 时间: 2013-4-22 14:59
haha yea….i think the 2008 question part 2 is exactly the same as the maclin case作者: wake2000 时间: 2013-4-22 15:00
Sorry to bring this up again, but I reviewed this discussion after some inflation confusion myself. You mention that in the Maclin case, they make no reference to inflation, but they actually do. On the second page of the guideline answer for that problem they say, “Note: No inflation adjustment is required in the return calculation because increases in living expenses will be offset by increases in Christopher’s salary.” Now, they do not mention any inflation in the case, so are we supposed to exclude it if they don’t give us an inflation number? I do not feel comfortable relying on that…
In the 2004 Maclin case: “After-tax salary increases will offset any future increases in living expenses”. - they have a 26000 difference between income and expenses… this difference will increase over time due to inflation as you guys have mentioned. I do not understand why they do not adjust for inflation on this one using the logic of the other cases… Only logic is this test is outdated and they changed it. I am ignoring this case and sticking to the future cases:
2011 is straight forward and they add inflation.
In 2010: In this case, they say, “Her future salary increases are expected to match any increases in living expenses on a pretax basis. They do not adjust for inflation in the return calc. I believe this is because the IRA contribution of 12000 is fixed and will not change with inflation. This doesn’t exactly make sense because the 12,000 difference will increase as a result of inflation. However, they state that this 12000 contribution will be fixed forever… fixed payment = no adjustment for inflation at the end.
2009: Tracy’s “Pension income from both Patricia’s company plan and the government pension plan is fully indexed for inflation”. There is a difference in the pension income and expenses, which will grow over time with inflation. This makes me think add inflation at the end. They also mention maintaining the real purchasing power several times in this case. The return calc includes inflation.
In 2008 part 1: The mortgage payment is fixed at 55k and will not increase with inflation. However, “Their salaries are expected to continue to cover their living expenses to retirement.” There is no difference between their A/T salary and their expenses, so this will not grow and the 55k morgage will not grow. Yet they adjust for inflation in the return calc…. They say that they want to maintain the inflation-adjusted value of the portfolio several times in the case. 作者: RMontgomery 时间: 2013-4-22 15:00
Level3Once wrote:
Sorry to bring this up again, but I reviewed this discussion after some inflation confusion myself. You mention that in the Maclin case, they make no reference to inflation, but they actually do. On the second page of the guideline answer for that problem they say, “Note: No inflation adjustment is required in the return calculation because increases in living expenses will be offset by increases in Christopher’s salary.” Now, they do not mention any inflation in the case, so are we supposed to exclude it if they don’t give us an inflation number? I do not feel comfortable relying on that…
In the 2004 Maclin case: “After-tax salary increases will offset any future increases in living expenses”. - they have a 26000 difference between income and expenses… this difference will increase over time due to inflation as you guys have mentioned. I do not understand why they do not adjust for inflation on this one using the logic of the other cases… Only logic is this test is outdated and they changed it. I am ignoring this case and sticking to the future cases:
2011 is straight forward and they add inflation.
In 2010: In this case, they say, “Her future salary increases are expected to match any increases in living expenses on a pretax basis. They do not adjust for inflation in the return calc. I believe this is because the IRA contribution of 12000 is fixed and will not change with inflation. This doesn’t exactly make sense because the 12,000 difference will increase as a result of inflation. However, they state that this 12000 contribution will be fixed forever… fixed payment = no adjustment for inflation at the end.
2009: Tracy’s “Pension income from both Patricia’s company plan and the government pension plan is fully indexed for inflation”. There is a difference in the pension income and expenses, which will grow over time with inflation. This makes me think add inflation at the end. They also mention maintaining the real purchasing power several times in this case. The return calc includes inflation.
In 2008 part 1: The mortgage payment is fixed at 55k and will not increase with inflation. However, “Their salaries are expected to continue to cover their living expenses to retirement.” There is no difference between their A/T salary and their expenses, so this will not grow and the 55k morgage will not grow. Yet they adjust for inflation in the return calc…. They say that they want to maintain the inflation-adjusted value of the portfolio several times in the case. 作者: stockjaguar 时间: 2013-4-22 15:01
It’s also important to note that the Maclin case is all the way back from the 2004 exam–that’s a long time.作者: Nishant1 时间: 2013-4-22 15:01
Exactly. That is why I am ignoring that one. Thanks! Now we will rock this IPS!!!作者: malbec 时间: 2013-4-22 15:02
Just printed IPS guideline answers(part A only) from 2007 to 2011, one page per year…作者: Iginla2010 时间: 2013-4-22 15:02
yea good idea..tomorrow im planning to do a quick scan for all the recent guideline answers from individual and institutional ips.
i took a nyssa class and the professor strongly recommended not looking past 2009 or 2008.
