Reading 9 EOC Q 2.

[sachin_patel]

Here is the question.
Determine Christa’s return requirement and evaluate whether her portfolio can be expected to satisfy that requirement if inflation averages 3 percent annually and she reduces her annual living expenses to €100,000 by combining her apartment and studio.
In my answer,
I kept aside next year’s expense, 132,500 plus 132,500 emergency reserve requirement aside and
calculated return based on total investable amount 1120000 - (2*132500) = 855000 and my answers were aparently not right because the EOC considered next year’s amount in investable.
Am I missing something?
How should we treat immediate needs or emergency reserve? (consider part of portfolio or set aside?)
Thanks

 

[tozerrt]

I believe any *immediate/short-term financial needs* would be excluded from the investable portfolio, while any **emergency reserve** can be included in the portfolio but must be held as liquid assets/cash.

 

[Galli]

“Needed cash” = Keep as cash, do not invest. The obligation date and requirement are known.
“Emergency reserve” = Keep as liquid as possible but still seeking a return. Obligation date and requirement are not know.
Just have to make sure the two constraints are addressed in the portfolio. You wouldn’t expect the emergency reserves to be invested in real estate, or high-growth tech stocks etc.

 

[sachin_patel]

Got it..
Thanks for the insight!!! Both replies are helpful

 

[sachin_patel]

I went back to the question..
What about its listed as “ongoing expense” same as reserve? Treat similarly as reserve?

 

[Ramos4rm]

well if its an ongoing expense its allocated to something besides investments right? So shouldnt be included in investable assets. Do a lot of these and try to memorize the different cases…unfortunately I found sometimes it wasn’t so much logical as it was memorization.