NakedPuts00

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.