When calculate required return , the cash reserve is not included. When calculate liquidity requirement, the cash reserve is included. Is the treatment of cash reserve explained in CFA curriculum?
Okay, cash reserve has to be part of liquidity requirement. Not sure about cash reserve role in required return.
why is cash reserve not included in required return calculation?
It’s a part of your investable asset base but it’s just going to be sitting in cash equivalent/cash in your portfolio.
Theoretically it should be added to return calculation but usually isn’t in CFAI material.
Unless you keep that cash reserve under your pillow in bed.
In 2013 you will see they accepted either answer for return. They explicitly stated they wanted a cash reserve carved out. I personally error on the side that a cash reserve is NOT to be invested in anything that is not a cash/cash equivalent, hence not an investable asset.
I have seen in the past exams that either including or deducting from asset base is allowed for the return calculation.
Just saw the response above me…Yes, 2013 exam
i dont think cash reserve is part of required return, i have seen it included in both liquidity requirement or total investable asset, as mentioned above TIA can either include or exclude cash reserve
CFAI 2017 Mock (most recent data point) included…
Okay, it is best to include cash reserve in total investable assets. thank you guys.
the 2013 AM mock question 1, cash reserve of 250,000. It is not included in cash needed when calculating after tax required rate of return?
required return = cash need / total investable asset
is cash reserve not in the cash need?
Cash reserve is not in the cash need, but it would be in a liquidity requirement.
Were you referring to Sunnydale case? If so, it was cash, not cash reserve in the case. They are completely different concepts. Cash reserve I take it as emergency reserve, which can be excluded or included from asset base, but cash mush be included.
The way I see it is, cash reserve is still a part of the investable portfolio unless specifically stated that it is not to be considered. It does generate a return, although low. It also adds diversification to the overall portfolio. You are typically just designating a % of the holdings to be in cash, not pulling them out of the Asset base, so therefore it should be included. Again, unless specifically stated that the client maintains the cash reserve separately and it is not part of the portfolio.
For Liquidity, well it is the definition of liquidity so not much more to add here really.
In 2013 AM, it the cash reserve can be included or excluded, either way is correct. It makes sense to be excluded too, as it’s out of PM’s discretion if client needs it and should not be counted into their return calculation.
The underlying theme I have seen after doing 2009-2016, all Schweser mocks as well, is that including cash reserve is dependent upon when/or if it will be taken out of the account for use. For example, John Smith wants to buy a boat in a few months; in this case, remove it from the asset base because itll be leaving soon anyways. Second example, John Smith requested that his advisor keep a small cash reserve in his account for emergencies; in this case, the intent to take it out is not immediate or in short duration, so its intent is to remain as part of the portfolio. From a performance measurement standpoint it may not be fair to include it in the asset base due to the drag, however, this is not performance measurement. I am sure itll be clear either way but I like to think of including it or not based on its true underlying intent for use. If itll be coming out soon, less than a year, take it out. If not, leave it in.