I’ve noticed some discrepancies between the CFA study materials and some mock/sample questions. Sometimes they want you to use division to calculate inflation and risk premiums, other times subtraction. For example nominal interest rate = 10% and t-bill rate is 3% Sometimes they want 1.1/1.03 -1 = 6.8% risk premium, other times simply 10%-3% = 7%. Does anyone know what the official CFA position is on this (if they have one)? Personally, never in my academic or professional career have I used division, I think that is quite dumb.
I think the division is the most accurate and the subtraction is the short-way. Just like compounding rates, or Forward/Spot rates, you use the divisions/multiplications.
You should tell us where you got your degree so we can never go there. If hamburgers cost $1 today, and you can invest your money at 10% nominal for one year, but burgers cost $1.05 at the end of the year then what is the increase of the number of hamburgers you can buy after the year? If you have 100 dollars at time 0 you will have 110 dollars at time 1, but every hamburger will cost 1.05 dollars so you can only buy 110/1.05 hamburgers. Thus your invested has only realized 1.1/1.05 real return. I guess if your school thought dividing would be too complicated they could have told you to subtract to get an estimate.