Expected nominal return - operating cost

CFA Level III Portfolio Management
#1

The following data was given:

Expected nominal return (700 bps)

inflation (400 bps)

management fee (30 bps)

operating costs (20 bps

The question : what is the maximum spending rate?

The solution used the following formula: (lets not talk about adding vs multiplying issue),

Expected nominal return that preserves real value of portfolio = (1 + spending rate) × (1 + inflation) × (1 + management fee) – 1

Why not take into account the operating cost? So why not used this formula:

Expected nominal return that preserves real value of portfolio = (1 + spending rate) × (1 + inflation) × (1 + management fee) × (1 + operating cost)– 1

#2

Op. Fee is part of spend. No need to double count it.

#3

Thanks for the quick answer!

I guess it is a general concept, that I missed.

So it means op.fee should not take into account separately in the liquidity constraints either as it is already in the general spending

#4

In one word Yes

#5

To extend the issue:

Example in older Kaplan mock exam, they calculate as follow:

Required nominal return = (1 + expected real rate) × (1 + inflation) ×(1 + operating cost)– 1.

min spending was 0% and management fee was not given. The vignette described the return has to cover the operating cost.

So I guess there could be a question, where the operating cost should be added, but probably then the min spending is zero. But if it is not zero, the operating cost is included in it.

However, I went through the CFAI books, but I could not find an exact answer