CFA 2013 AM Q6 B & C

[tezakhiago]

For question B, I determined the correct required return in dollars ($9.603M) and the correct dollar amount of the portfolio ($97M), but then I deducted the incoming cash flow of $2 million from the required return because it will reduce the amount the portfolio has to generate. So my final required return was different from the guideline because I factored in the outside contribution where they did not.
For C, I figured out the liquidity need will be $6.767 million, and made a note that this amount includes the $2 million contribution. The guideline answer says the liquidity is $4.676 because they deduce the $2 million earlier. Both answers are saying the same thing basically, but my final number is different from the guideline.
Can anyone spot any holes in my logic, and if the CFA will still give full marks if your answer makes sense?
Furthermore, part D, why will the return objective not increase? Why is the foundation ignoring the incoming $2 million to meet it’s spending and inflation requirements, when it then counts on it for liquidity needs? To me it seems like the foundation is setting a return requirement to meet all of it’s spending/inflation needs WITHOUT factoring in the previously guaranteed contributions, then turning around and using those contributions to help meet it’s obligations. It seems like generating a return requirement this way will INCREASE the real value of the portfolio over time, not PRESERVE it as stated in the vignette…

 

[SWhip]

Contributions are not gauranteed, they are generally not factored into the return requirement. For instance, defined contribution plans usually don’t factor in company contributions to the return requirement, they focus on their required return objective of the minimum being the liability discount rate.
As far as liquidity goes, since you did get the contribution its cash that you can use to reduce your liquiditiy needs.
As for the effect on the return objective, since you don’t include contributions into the calculation, it should not affect the return objective when contributions cease (see how contributions ar not gauranteed, better to calculat a return objective ex contributions since contributions are not always predictable).

 

[tezakhiago]

I still don’t get why they would use the contribution to determine liquidity needs but not use it to determine return. Is it a timing thing? ie. liquidity is what we need now and return is what we need in a year? So, we have the contribution now so use it for liquidity, but we don’t know if we’ll get it again in a year, so don’t factor it into return. Is that the right way of thinking about it?