simple Q: IPS, do I include the cash reserve in the rate calculation? total, reserve, include, simple

brain_wash_your

e.g.

A wants to have 3 mth salary for emergency cash, (i.e. 30,000)
A has total of 1M
A needs 20000 per year for expense

Shall i do:
1. 20000/1M
or
2. 20000 /(1M-30000)?

Iginla2011

1 dude, for the win

NakedPuts00

1

When you pick portfolio though make sure that it has 3 months cash.

Analyze_This

obviously though you need to raise it to e(1-r) and then divide by 2 to account for the semi annual compounding

nannan66

why 1?

shudnt it be 2?

PalacioHill

cfatime.... why not 2?

wake2000

Definitely 1.
emergency cash for 3 months is a liquidity constraint that you will consider in portfolio allocation

strikethree

Not 2 because the 30K is not an immediate outflow that needs to be satisfied from the 1M investable asset portfolio.

It just means that from the 1M available to invest and allocate to different asset classes that 30K of it must be allocated to assets that are very liquid i.e. cash and money market instruments.

The 30K is NOT reducing the investable asset base..

bodhisattva

oops my bad! i interpreted as him needing cash RIGHT NOW to spend and not as an emergency/liquidity requirement.

thanks

bboo

Because "cash" is not actually in cash, it's cash instruments (Inc treasuries) which are highly liquid and earn a yield. That's why.