IPS required return - I give up

cfalevel2011

There is no way to nail this down, so I've decided to just let this go and try to make a logical argument and get partial credit whenever they went a specific number. Besides, it's only usually one out of several questions.

As far as formulate, or "discuss" a return requirement, it seems to me that the words: "provide for meeting annual living expenses on an inflation adjusted basis and preserve purchasing power of the portfolio utilizing a total return approach" pretty much meets 90% of the situations....

liangfeng

Even after looking at the "Jurgen" example 5 times in various places (CFA book, Stalla) I couldn't even nail the question when I took the 2007 morning session. I'm just going to label all my inputs, clearly write all my calculations and snag partial credit.

NO EXCUSES

IAmNeil

ditto....although I do wrestle with it, I am convinced the following steps work:

Convert the case into a simple TVM problem--
1) First figure out n, PV, FV, PMT (ALL on after-tax basis) Details below.
2) Next compute i
3) Then Add inflation and management fees (multiplicative)
4) Optionally if pre-tax number is desired divide by (1 - tax%)

(i) PV is always net of any immediate disposals of cash / liabilities (credit card debt, house repair, downpay). Typically don't include residence in PV
(ii) FV = PV usually due to clients' bequest desire, then the required rate is simply PMT/PV. Things get complex if PV <> FV, e.g. (a) lump-sum needed to buy annuity (FV > PV), or (b) retiree with no charitable intention (FV <PV)
(iii) PMT = Salary - Expenses
(iv) n = Time horizon for planning (First of multi stage)



Edited 3 time(s). Last edit at Sunday, May 8, 2011 at 07:56PM by jbaphna.