Inflation Pass Through recently, through

leadcfa

I recently found out that there are two formulas for inflation pass through.

When do you use (1/(r+((1-pass through)*infl)) and when do you use the other formula?

bodhisattva

Thank you Chuckrox8!

zephyranalyst

Dreary Wrote:
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> P/E1 = 1/(r- FlowThrough%*Inflation).
>
> Why the complex formula?
>
> r here is nominal...you can always go back and
> forth between real and nominal, nominal rate =
> real rate + inflation.

The other formula maybe more intuitive since you add to real required return whatever left of inflation due to flow-through.



Edited 1 time(s). Last edit at Friday, June 3, 2011 at 07:00PM by jpsi1.

mkytz15

jpsi1 Wrote:
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> Chuckrox8,
> Did you finish ethics review? Any points to pay
> special attention.

Ethics is always such a curveball. It goes without saying that soft dollars will be on the exam. I would recommend reading the actual CFAI guide to soft dollars that's on their website. It's much more straight forward than the text. I think we'll see probably six questions relating to the standard and code and then probably 3 or 4 on soft dollars and a couple on prudent investor. Ethics is tough. I can guarantee you that you will be scratching your head on a few of the questions.

Although it's getting late, I would definitely look at some of the differences between old vs. new prudent investor, flip through Ethics EOC, and look at some of the case studies. Ethics can be easy points, but it can also be a deal breaker.

chandsingh

P/E1 = 1/(r- FlowThrough%*Inflation).

Why the complex formula?

r here is nominal...you can always go back and forth between real and nominal, nominal rate = real rate + inflation.

joehogue

whew..u scared me there...
they are the same lol

luckygiftvn

Chuckrox8,
Did you finish ethics review? Any points to pay special attention.

former

Check out ?'s 13 & 14 of reading 38, it's the same formula, but they specify real vs nominal rates for each question. Formula calls for real rate of return to be used, so if they give nominal we have to adjust for inflation. And per mock it looks we should assume nominal unless stated otherwise.



Edited 1 time(s). Last edit at Friday, June 3, 2011 at 06:10PM by jgrandits.

wilslm

Yes, that's correct.

I found the mock question which Zero mentioned, it's question 60 on the 2011 AM mock. In this question they provide the nominal rate of return, so we needed to subtract inflation to get the real rate (as you've shown above).

Cheers

dyga

Chuckrox8 Wrote:
-------------------------------------------------------
> Sorry for the confusion. I guess there is only
> one formula.
>
> So if I am given r in real terms i just do
> 1/(r+(1-pass through)*infl))
>
> If given in nominal terms 1/((r-i)+(1-pass
> through)*infl))
>
> Is that right?


i guess..