Cash Reserve and Investable Base - IPS

[arubinsztajn]

Schweser Practice Exam vol 2, Exam 2 AM Session question 1 asks to calculate the return objective. In the question it states “Smythes don’t forecast any unusual expense in coming year but as always like to have enough cash on hand for emergencies”
No specfic level was stated for emergency reserves and in the answer, Schweser calcs Required Return based on an investable base that does not account for emergency reserves.
In the question I assumed a 6mo need for Cash Reserve (believe anywhere from 3 - 12mo is appropriate based on circumstance) and deducted that from the investable base. Is this approach wrong? If you are not given an explicit amount of reserves the client is looking for, are you suposed to ingore the “have cash on hand for emergencies” and calculate required return on the total investable base?
Or would the grader accept the logic of deducting a cash reserve and accept the Return Requirement I calculated? How do you handle this on exam?

 

[arubinsztajn]

Bueller…? Any thoughts here?

 

[BrewCityCFA]

My general approach is not to deduct anything from investable base unless a specific amount is given. As a general rule you shouldn’t need to make any “assumptions” in order to solve the problems. That being said, in this case, I probalby would at least mention the cash reserve under liquidity needs.

 

[Chuckrox8]

^^Yes. Unless you are given a specific dollar amount don’t include it in the return calculations. You can mention it in the liquidity constraints if given the opportunity.