Sign up  |  Log in

Required return inclusive of inflation for next year

hi all,

the question about the required return calculation seems to come often in the past exams and i think that i am missing something. 
can you please help me with the below? 
Here is the question (I am extracting it from 2011 Essay but simplifying it): 

  • Asset base is USD 4.3M
  • living expenses of this year 250k
  • inflation is 3%

the aim is to calculate the required nominal return next year.

what i did is the following: 

  1. calculate the return from a real value perspective 250 / 4.3M = 5.8%
  2. add the inflation component to get the nominal return: 4.8 + 3 = 7.8%

the correction seems to add one step before my step one which is inflating the expenses (250 x 1.03) and then they follow the rest of the logic. 

i don’t understand why we use the inflation two times. isn’t it there a double counting?


With exam day right around the corner, Schweser's Final Review products are designed to help you finish out your study plan and walk into the testing center feeling prepared and confident.

You can refer to the similar question in the 2017 AM paper. CFA gave a full explanation on your exact question.