I thought we were supposed to assume that principal should be maintained
I don’t think you would see something quite like this on the actual exam. CFAI will ask the return requirement in one of two ways: a) the return requirement for a specific time, usually next year such that the principal is preserved, or b) the return requirement in order to have some amount of money at some point in the future. I see what Schweser is doing here but CFAI wouldn’t pull something like this on the exam. If they did, it would take way too much time to do this correctly. I think CFAI is more interested in testing candidates on how they identify each piece that fits into the return requirement (salary, living expenses, tuition, one-time expenditures, desire to have a certain amount of money at a certain point in time, etc.) and how to address taxes and inflation for each piece. Unless specified, the principal should be preserved. In that case, the return requirement for the next year would be 75K/3M + 3% = 5.5%. If you are looking at a 5-year period, I would say PV = -3M N = 5 PMT = +75K FV = 3M CPT I/Y = 2.5% Return Requirement = 2.5 + 3 = 5.5% If you are looking at a 30-year period, I would say CF0 = -3M CF1 = +75K F1 = 5 CF2 = +110K F2 = 5 CF3 = 90K F3 = 19 CF4 = 3M + 90K = 3.09M (since it didn’t state the investors had no desire to leave any money, I assumed all principal was preserved and was returned in 30 years) F4 = 1 CPT IRR = 3.02% Return Requirement = 3.02 + 3 = 6.02%
mwvt9 Wrote: ------------------------------------------------------- > The return objective in an IPS should only be for > the first time horizon. There are multiple time > horizons in this question. I agree with this, the IPS and portfolio should be oriented towards the initial horizon. The IPS could also mention future stages and the need for reassessment as those stages approach, but I really don’t think they should be rolled together like this unless the question clearly stated the portfolio would be self amortizing (very unlikely). For instance, in a multi-staged non-amortizing portfolio with high early liquidity requirements and a focus towards principal protection, using a compounded rate would run a high risk of liquidity shortfall.
i got 5.58% too. this question is BS and not at all how CFAI likes to test the subject. they aren’t about PV games, a L1 objective. and considering taxes aren’t even part of the equation, especially have a tough time with this vignette. individuals always care about taxes, especially in retirement.
What was the solution?
I am drunk right now - D???
I would say B, I multipled my 5.5 x 1.3 to adjust for pretax vs. after-tax returns, but there’s no tax rate information in the question this question is odd, more like a level 2 question with the PV stuff you guys are doing, forget about this
Sorry, but a really stupid question - where is the F0 key (to repeat CF for multiple years)on the HP12C? Understand the math, but have never done these type (with many recurring years of same CF) of IRR calcs on HP12C. Thanks.
it is the FV button g —> Nj
Got it. Thanks mwvt9.
Sure. You may have to use it for calculating a MWR, but HIGHLY unlikely.