It seems like CFAI and Schweser calculate required return differently. The curriculum uses the following equation: r + i while Schweser uses: (1+r) (1+i) -1 r = return i= inflation In one of the CFA examples, using the equation from Schweser would have cost you points. As the portfolio had a 7.5% expected return, the Schweser equation gave 7.65% and would have eliminated that choice.
7.65% is the more accurate return…7.5% is just an estimate approach. They are both Valid answers and would both be given full credited if you showed your work…
What if it was multiple guess? I mean choice?
They wouldnt do that to you…Unless it states using the approximation method or something like that…
I recall the CFA texts saying that both are acceptable answers, however, the multiplicative return is superior because in takes into consideration compounding.
how does this differ from LVL 1 and 2 ? we had same exact options to calculate return… so far we are through with those and got to LVL 3. I dont think we need to worry about this - use approximate or exact. In multiple choice the margin will be wide enough for you to pick correct answer- they are not trying to catch you on such a minutia… In essay show your calculation - I would go for exact since this is what would be preferable for your “real life client”.
always go for multiplicative
In personal or instituitional portfolio question, you dont have to use multiplication. simple addition is enough.
…or you could just take the square root of the number and divide by Pi.
comp_sci_kid Wrote: ------------------------------------------------------- > always go for multiplicative There’s a question in Book 2 of the CFA readings that if you used the multiplicative instead of the sum, you would have gotten the question wrong. that’s what pushed me to start the thread. the question had 4 different portfolios and you had to choose the best one for the individual. The multiplicative gave a return of 7.65% and the sum 7.5%. I used the multiplicative, therefore I eliminated all portfolios that had a return below 7.65% as those portfolios didn’t meet the return requirement of the individual. the answer ended up being the portfolio with the 7.5% return and in the answer, it stated that the portfolio met the individual’s return requirement of 7.5%.
you can do both, actually both are used in the guideline answers of the 2007 examination. page 2 of the answers: 4.84% + 2.50% = 7.34% “OR” (1.084 x 1.0250) = 1.0746 = 7.46%.
cfacfacfa Wrote: ------------------------------------------------------- > I recall the CFA texts saying that both are > acceptable answers, however, the multiplicative > return is superior because in takes into > consideration compounding. yes. see solution to Q1, 2007 exam.