GIPS Capital Return 2011 Q59 return, period, amongst, why, 2011

pawn

Just finished the 2011 PM Mock and amongst many wrong answers i got the GIPS RE return calc wrong.

Capital Return = (V1 - V0 - Capex + SaleProceeds) / CE

V1 = 13m V0 = 11.7 Capex = 2.7m Sales=3.5m CE=13.25m

Makes sense according to the formula BUT why dont we adjust for the Capital Contribution in the numerator?
Portfolio Value has increased by 1.3m but there was a 1.5m contribution during that period aswel?

Thanks in advance for any views.

ohai

Dont see how it can be justified as a 11% increase when about 8% of that has come from Contributions - that isnt a return.

i guess ill just accept it and move on. rule 1 - dont question CFAI.

CFA "JUMP!", ME "HOW HIGH?"

nannan66

Agreed. But, i think the key is that you don't know what is in the "Portfolio Fair Value".

dyga

jmac is right, capital contributions will reflect into V1.

Iginla2011

If you subtracted capital contributions from the numerator you would understate the return. Consider:

Beginning value of house = 100
capital contribution = 10
capex = 10
Ending value of house assuming no change in market value = 110 (i.e. just increase in value due to capital improvements).

If you included capital contributions your numerator would be 90 and it would look like you lost money.



Edited 2 time(s). Last edit at Friday, June 3, 2011 at 10:37AM by famouschicken.

Chuckrox

trying to help - let's see how this goes

Return component of RE = true change in intrinsic value

MV1 - MV0 (as is basic) + you add any thing that would've reduced MV1 e.g. Sales - you subtract anything that would've increased MV1 e.g. Cap expenditures.

* if you make contributions to the account (artifical increases) it should be subtracted

thoughts..?