Reading 13 .Principles of Asset Allocation ( page 125 - The Smiths example)

CFA Level III Portfolio Management
#1

Hi,

Can someone explain to me how they are working out the figures on the Smiths example.

  1. I got this answer right.

  2. This answer was later corrected to 6,275,000 but I still cant get to that answer.

  3. I got 6,691,026 for this one

  4. I got 2,682,718

Can someone let me know where I am getting wrong.

Thanks

#2

Can you pl. Post the whole thing ? We are kind of done with the books and the vital source. Plus for 2020, the 2019 stuff won’t work I believe. More than 35% changes have taken place.

#3

Post the entire question and all relevant data and details

#4

Hello,

There are no questions for this, its part of the reading on Developing Goals-Based Asset Allocations (4.3 Construction Sub-Portfolios).

#5

Hi, I saw your initial post looking for a study buddy I am located in woodmead and alberton. Please let me know if you are still interested in forming a group.

#6

Good question…looking back at it, I am also struggling.

inflation 2%

discounting rate 6.1%

->real discounting rate = (1.061)/(1.02)-1= 4.02% for 25 years

assume annual spending=$500k (or do we need to 500*1.025=552 at beginning of year 6?)

PV(4.02%,25 periods,500,1 for beginning of period)=$8108k at beginning of year 6

PV of 8108 at the discount rate of 4.02% on 5 years (to bring back to year 1) = $6657k

if we use discount 6.1% for the PV on 5 years $6030k

Still far for the correct answer of $6275k

Anyone?

#7

If you look at the 1st goal, the 2% inflation only kicks in from Year 2 onwards, so by Year 5, the expenses will be $500,000(1.02)^4 = $541,216.08.

At T = 5, the PV of the annuity stream from Year 6 to Year 30 (i.e. 25 years) is:

N = 25

PMT = 541,216.08

I/Y = 4.0196

FV = 0

[CPT] [PV] -8,437,432.29

Discount it back to T = 0 , you will get 8,437,432.29/1.061^5 = $6,275,283.94

1 Like
#8

Thanks,

#9

when should i use real rate when to use nominal rate to discount?

#10

If the cashflows are in nominal terms, then use the nominal discount rate.

If the cashflows are in real terms, then use real discount rate.

3 Likes
#11

Hi,

Can you please show details how you calculate the first goal?

#12

In [CF]:
C01 = 500,000

C02 = 500(1.02) = 510,000

C03 = 500(1.02)^2 = 520,200

C04 = 500(1.02)^3 = 530,604

C05 = 500(1.02)^4 = 541,216.08

Then compute the [NPV] using I = 2.3

Alternatively:

Adjusted real-cash flow per year
= 500,000/1.02
= 490,196.0784

Adjusted discounted rate
= 1.023/1.02 - 1
= 0.294118%

END Mode
0.294118 [I/Y]
490,196.0784 [PMT]
0 [FV]
5 [N]
[CPT] [PV]

#13

Thank you, just wanted to confirm that i am right.