2013 AM paper Q 6 (B)

[broadex]

When computing rate of return in year 2 :
1. Why are we not taking €3m from the investible assets to make it €97m.
2. In addition, since we are computing return for year 2, shouldn’t we take into account Year 1 expenses (inflation adjusted) upto year 2 and use this as the numerator with the denominator as the net investible assets of $97m less used in funding expenses in year 1.

 

[Viceroy]

I am correcting this right now, will come back when I reach that question.

 

[whatsyourgovt]

6b or 6c?
You adjust the portfolio value in c to 97 but in b you are simply calculating the nominal return.
(1.05)(1+infl)(1+mgt fees). the mgt fees will be accounted for, as it relates to inflation, with the second bracket.

 

[broadex]

whatsyourgovt wrote:
6b or 6c?
You adjust the portfolio value in c to 97 but in b you are simply calculating the nominal return.
(1.05)(1+infl)(1+mgt fees). the mgt fees will be accounted for, as it relates to inflation, with the second bracket.

6.B - i understand we want to calculate return that is why im not sure why we are not using the investible assets of 97 etc.

 

[kjsgbp]

Ummm, Part B is asking for just the required rate of return = 6% spending + 3.5% inflation + .4% management expenses = 9.9%
Part C is what you seem to be more concerned with. This is a tricky question, at the start of year 1, the portfolio spends 3M so 97M to start year 1. The vignette states two important things here “Return on the portfolio was 9% in year one” and “Beginning in year 2, the foudation will have an annual spending requirement of 6%”
So at the end of year 1 you have 97M * 1.09 = 105,730,000 with no spending requirement for year 1

 

[Viceroy]

^^
Yep, the return requirement is not a function of investable assets, which are in turn used to calculate the liquididy requirements.