CFAI AM 2014 Question 1B

[archived_user]

The question is asking for liquidity requirement from the client’s portfolio for the coming year.
Relevant info, the clients (the Crusoes) will pay their mortgage of $25,000 and start a trust with $60,000 for their daughter’s upcoming education needs IN THE NEXT FEW WEEKS. Also, they are able to save $35,000 per year which are transferred directly into their investment portfolio and immediately invested in the existing asset allocation.
Obviously, $25,000 and $60,000 must be listed. I also listed $35,000 in savings, but apparently it should be excluded. Can anyone tell me why?

 

[archived_user]

I guess liquidity requirement means withdrawals from the portfolio only.

 

[archived_user]

funny.oriole wrote: I guess liquidity requirement means withdrawals from the portfolio only.

First, you shouldn’t guess; you should know.
Second, you should know that liquidity is cash flows out of and into the portfolio.

 

[archived_user]

sig wrote: The question is asking for liquidity requirement from the client’s portfolio for the coming year.
Relevant info, the clients (the Crusoes) will pay their mortgage of $25,000 and start a trust with $60,000 for their daughter’s upcoming education needs IN THE NEXT FEW WEEKS. Also, they are able to save $35,000 per year which are transferred directly into their investment portfolio and immediately invested in the existing asset allocation.
Obviously, $25,000 and $60,000 must be listed. I also listed $35,000 in savings, but apparently it should be excluded. Can anyone tell me why?

I believe that the key here – which the guideline answer most definitely does not make clear – is that the savings are transferred automatically into their portfolio. From that standpoint, it’s essentially as if the portfolio had earned that amount as a return: they don’t have the option of not depositing it (as they would have if, for example, they received an inheritance).