Flok

Interesting debate – according to the CFAI text, what CPK is saying appears to be the right way to approach the question. Thanks for all the feedback!
I’ve been doing the EOC for this reading (Reading 10), and did have two more related questions that would help shed this light on some whole thing. These are Q2 and Q6 from Pg. 195 (answers starting on Pg 205) of the Vol 2 CFAI text. By the way - I know we can’t post any exam info but are we able to post CFAI question text here? If we can then I’ll edit in the questions.
Q2:
- The way they calculate the return requirement here is (100,000 - 50,000)/1,120,000 = 4.46% (real return)
- The way they calculate the portfolio return is 82,500/1,120,000 = 7.4% - 3% inflation = 4.4% (real return)
- Based on the above two, the text states that the portfolio return doesn’t meet the portfolio return.
What I don’t get about this is why is the return requirement assumed to be in real terms and thus inflation need not be subtracted, but portfolio return is not? Wouldn’t inflation act on both of these percentages?
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Q6:
The way the text determines the answer here is by converting the return/tax percentages into dollar amounts, and then doing the calculations. I did the same thing in percentages, so the answer should be the same, but it’s not:
- For the high growth income fund, for instance, the book calculates the net investment gain as [(20,000 - 5,000) + (120,000 - 13,500)] = 121,500
- But if you do the same calculation in return terms: [(.02 * .75) + (.12 * (1 - (.12 * .15 * .75))] = 1.5% + 11.83% = 13.33%, and (1,000,000 * .1333) = $133,300, NOT $121,500
What’s causing this discrepancy - shouldn’t the dollar return calculated in either manner be the same?
Thanks - this has been stumping me all afternoon!