R10 EOC2 - Real Return
Q: Christa’s portfolio is worth $1,120,000 with an expected return of $82,500/year. She has $100,000/year expenses and $50,000 income. Assumption is that inflation averages 3 percent annually.
The solutions explain her required real return is $50,000(income of $50,000 less $100,000 expenses) or 4.5 percent as a rate of return on her portfolio. Based on the current expected real return of 4.47%(82,500/1,120,000 minus rate of inflation) the portfolio is not expected to meet the return requirement.
Without a defined time frame or the investor’s specific required rate of return, how can we arrive at the 4.5% required real return stated above? The expected portfolio return of $82,500 just by looking at numbers should be more than enough to cover her return requirement of $50,000 even in hyperinflation.
Can someone please help?
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