IPS - living expense inflation adjustment

[FrankCFA]

Galli wrote:
Frank - Is there an actual answer to this question or did you make up the inputs to it?

I saw the CFA past exam asking “Calculate nominal pre-tax required return” and I made up this question…

 

[Galli]

JSobes wrote:
Can someone confirm real pretax is 2.19 and nominal pretax is 4.19% please? That is my understanding, I don’t typically do the calculator but write out the expenses since we usually will need to show our calculations…

2.19% is the nominal return

 

[FrankCFA]

Galli wrote:

JSobes wrote:
Can someone confirm real pretax is 2.19 and nominal pretax is 4.19% please? That is my understanding, I don’t typically do the calculator but write out the expenses since we usually will need to show our calculations…

2.19% is the nominal return

Why? Real return + inflation rate = nominal return ?

 

[Galli]

FrankCFA wrote:

Galli wrote:

JSobes wrote:
Can someone confirm real pretax is 2.19 and nominal pretax is 4.19% please? That is my understanding, I don’t typically do the calculator but write out the expenses since we usually will need to show our calculations…

2.19% is the nominal return

Why? Real return + inflation rate = nominal return ?

You need a return on the asset that covers the 2% inflation on the 20k living expense, not 2% on the 1m.

 

[Tommy83]

This thread is hella confusing. I like Galli’s answers but this has gotta be a mind-F for anyone that reads this and tries to make sense of it. There’s not even a real answer that’s backed up by the CFAI. It’s a made up question! Trying to make sense of this is probably counterproductive.
If you’re looking for clarity, use the CFA AM exams from past years and Magician’s article (http://financialexamhelp123.com/inflation-in-required-rate-of-return-to-...). CFAI is what counts and Magician is the man.

 

[FrankCFA]

Tommy83 wrote:
This thread is hella confusing. I like Galli’s answers but this has gotta be a mind-F for anyone that reads this and tries to make sense of it. There’s not even a real answer that’s backed up by the CFAI. It’s a made up question! Trying to make sense of this is probably counterproductive.
If you’re looking for clarity, use the CFA AM exams from past years and Magician’s article (http://financialexamhelp123.com/inflation-in-required-rate-of-return-to-...). CFAI is what counts and Magician is the man.

Thanks Tommy, Magician! It’s helpful.

 

[dusnora]

Galli,
You state: (218,994/1,000,000)^(1/10) = 2.19%.
My calculation as follows:
= (218,994/1,000,000)^(1/10)
= (0.219)^(1/10)
= 0.859
Please respond, how can you comes up with 2.19% ?