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:
- calculate the return from a real value perspective 250 / 4.3M = 5.8%
- 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?
thanks