I have a question related to AM paper from 2013 part D.
Could you please help me to understand how we know that we need to remove the inflation from return. I understand that we need to remove the tax as table gives pretax return but not getting the inflation part.
In the text it says " two years later… achieving at least 3.5% annualized growth after tax purchasing power of the portfolio.
I thought that when question ask purchasing power of the portfolio we should include the inflation.
thanks
Text says annualized return in the after tax purchasing power what means after tax real rate return. Thus inflation should be subtracted after adjusting for taxes of pre-tax nominal return to compare whether each of this portfolio returns met target in real after tax basis.
Purchasing power is a key word. Maintain real purchasing power means to keep portfolio returns in real terms.
We know,
Nominal rate = Real rate + Inflation
==> Real rate = Nominal rate - inflation.
Hence, inflation is deducted.