Roy's Safety First Ratio with Endowments

[wangta01]

Pg 264 - Example 10 - they use the Roy’s safety first ratio as a criteria to pick between portfolios. My impression was that Roy’s safety first was: expected return - minimum acceptable return / standard deviation of expected return.
In this example, the return objective is 6.5% due to 4% spend rate, 2% expected inflation, and .4% management fees.
When calculating the Roy’s safety first ratio, they use the spend rate of 4% instead of the 6.5%. Why? That doesn’t make sense to me unless the endowment doesn’t care about inflation and the mgmt fee?

 

[igor555]

i would think the minimum would be 4.4 (spending rate and fees) and you dont maintain purchasing power….not sure how its 4% either…youre required to spend 4 and pay fees of 0.4…ehh

 

[wangta01]

Yeah exactly. I’m just hoping on the test, they make clear exactly what the “minimum” rate is. Or they take both answers.

 

[jahuntley79]

In the Final 3-day review workshop, Schweser has told us to assume, unless otherwise stated, that the investor will want to maintain the real value of its portfolio.
Also, I was also told that most candidates answers do not match the guideline answer. Keep in mind, the guideline response was constructed by a group of people with the benefit of open text books. If you answered the question and showed your calculations on how you arrived at the MAR, I believe you would get credit.
Just my .02

 

[jeffsick]

If I remember correctly that question said that the minimum acceptable return was the spending rate whcvih is 4%. Hence the Roy was calculated on that basis.

 

[wlL3]

wangta01 wrote:
Pg 264 - Example 10 - they use the Roy’s safety first ratio as a criteria to pick between portfolios. My impression was that Roy’s safety first was: expected return - minimum acceptable return / standard deviation of expected return.
In this example, the return objective is 6.5% due to 4% spend rate, 2% expected inflation, and .4% management fees.
When calculating the Roy’s safety first ratio, they use the spend rate of 4% instead of the 6.5%. Why? That doesn’t make sense to me unless the endowment doesn’t care about inflation and the mgmt fee?

wangta01 is this from CFAI? I couldn’t find this e.g in Vol 2. pg 264? where is it ?

 

[igor555]

jeffsick wrote:
If I remember correctly that question said that the minimum acceptable return was the spending rate whcvih is 4%. Hence the Roy was calculated on that basis.

why would minimum acceptable return not include mgmt fees?