“Assuming market value of the current portfolio remains unchanged”

CFA Level III
#1

Hello - Assume the following:

  • Market Value of the portfolio today is: $1,000,000
  • Clients have a return goal of 4%
  • Inflation is 3%

If the question reads: “Assuming the market value of the current portfolio remains unchanged”.

What would the market value of the portfolio be at the end of 5 years? In other words, would be grow the portfolio at 7% (or 7.12%), or would the Market Value of the portfolio still be $1,000,000?

Thank you.

#2

We cannot say; is the return staying in the portfolio (in its entirety), or are the clients taking some out to cover expenses?

#3

At first glance, I assume they are meaning that the real value of the portfolio is maintained and returns are taken out as we go. However you don’t give us much to work with.

#4

Thank you for the responses. I was equally as unsure about what it meant. The answer key grew the portfolio at the client’s target rate plus inflation. I had no idea why.

Below is the response I got from the source. I’m wondering if this this is something that sounds familiar to anyone who’s looked at past CFAI tests.

" Assuming market value of the current portfolio remains unchanged" means that in 5 years to retirement,

 There is no purchases of new shares/securities;

 There is no sale of shares/securities;

 No reinvested income e.g. no cash or reinvested dividends in the portfolio;

 Also, no short- and long-term capital gain distributions earned in the portfolio. In other words, no gains/losses

==> gains (losses) tend to increase (decrease) the market value.