Corner portfolios exactly, total, example, required, return

Zesty

I have a knack of doing exactly the wrong thing in these return calculations:

example:

in 2008 Morning CFAI , they give a return requirement and say there are expenses as well. Ok. So to get the total required return would you add or geometrify the required return and the expense?

Turns out if you the geometric , the constraint on Stdev is not met, and the answer if wrong.

So by doing the right thing ( IMO only ) you get the wrong answer.

Conversely to get to the right answer , suspend your judgement and do the wrong thing . Thing is how do I guess when to do the wrong thing?

nannan66

janakisri Wrote:
-------------------------------------------------------
> pfcfaataf , u got something there . It should add
> if expenses based on beginning values

Is there any rationale behind this ? CFAI did not indicate explictly, this confuses us !

liangfeng

Good Q. Probably thats how I failed last year?

Who has the best answer?

mar350

AMA Wrote:
-------------------------------------------------------
> janakisri Wrote:
> --------------------------------------------------
> -----
> > pfcfaataf , u got something there . It should
> add
> > if expenses based on beginning values
>
> Is there any rationale behind this ? CFAI did not
> indicate explictly, this confuses us !

it is simple math

1)fee on beginning value
T0 value = 100 $
fee = 1% = 1 $
net req. return=5%=5 $
T1 total value to cover req. return and fee = 100+1+5=106 .... 6 % return incl. fee

2)fee on ending net value
T0 value = 100$
net req. return = 5 % = 5
T1 net value = 100+5=105=100x(1+0.05)
fee = 1% = 105 x 1% = 1.05$
T1 gross value = 100+5+1.05=100x(1+0.05)x(1+0.01)=100x1.0605=106.05

3)fee on ending gross value
gross ending value x (1-fee%)=beginning value x (1+net req. return%)
gross return = (1+ net req. return)/(1-fee%)=6.06 %

I am sorry I should not start this. Just forget it, too much material to study, we do not need to add more.

canadiananalyst

Man you guys are spoiling 2008 for me, I'm supposed to be taking it tomorrow

NO EXCUSES

Windjammer

watch out for those little hoppers on them corner portfolios

aidebaobao

I remember this one.... This is not the first time that using the geometric versus additive gives different answers (asset allocation is another issue, some will bust the return requirement if you don't do geometric).

I did the same exact things, but since I knew it was the highest sharpe portfolio I figured it had to be right and resolved with addition. Then, if i remember correctly, the weights came out to be clean, like 75/25 or something whereas before using geometric it was like 72.243 or some odd number, you get the idea.

I know it's not the best indicator, but generally when I get a clean number like that I assume I'm on the right track. Plus the SD was like 10.19 or some small amount over the required 10, and when i resolved it was 10 even.

They should really stop the insanity and clarify how to solve, or make the answer such that either one will fit the requirements.