CFAI EOC Q2 Portfolio Management pg. 207 207, purposes, question, problem

atate2007

So working this problem Volume 2 pg. 207 and it says that Christa wants to keep aa emergency cash reserve equal to her annual living expenses. Then in the retun calc it leaves that money in her portfolio. Should the reserve not be stripped out for the return cal purposes…….
Also in their answer the number they seem to come up with is nominal for some reason and they subtract inflation…..lost there as well.
Thought I had this stuff nailed until I revisited this question. Thnaks for the help.

jcfa2011

For your 2nd q , please read carefully .
They give the inflation and want you to give them a real rate from the portfolio. The portfolio always generates only a nominal return in CFA land.
1.Requirements are always real-rate .
2. Portfolio always generates nominal rate of return.
Now look at the question again

soverby

the cash reserve still be kept in the portfolio, continue generating return…it should not be stripped out (mentioned somewhere in GIPS). The amount only effects on the allocation and/or liquidity needs….