Reading 17 EoCs Q19 - Inflation Component Not Included?

CFA Level III Portfolio Management
#1

Hi all,

Don’t suppose anyone has had a look at Q19 in Reading 17 on Asset Allocation (page 295) - is it evident why they’re not including inflation in the presumed return objective? i.e. CFAI are just using the 5% annual spending requirement as the minimum return required by the long-term asset allocation, however, it clearly states inflation is forecast to be 3.5%; so wouldn’t you calculate the return your asset allocation should be aiming for as: (1.05)x(1.035)-1= 8.68%??

Thanks in advance.

#2

REAL RETURN

#3

Not sure if it’s fatigue or outright stupidity, but where does it say “Assume the long-term allocation will be made subject to a real return objective”?

The only mention of “real” is when the question mentions that they’re worried about the real value of foundation assets and future grants declining due to inflation - if that is the case, wouldn’t you include inflation in the return calculation as above (to mitigate against inflation corroding the value of your assets & future grants) ?

Feel like i am missing something really obvious here ha

Thanks

#4

they said in the answer that the real return requirement is 5% - hence they excluded the inflation.

#5

^+1