Ok, maybe i am stupid or i am missing something, but can some one explain to me how should i properly adjust for spendins that will increase faster then inflation rate (given that these spendings are a part of my overall spendings) lets say i have 1,000,000 dollars and 100,000 increasing at 2% and 100,000 increasing at 5% what is the right rate of return? Schweser seems to be all over the place with some hypothetical numbers that won work in the long run. What is CFAI take on it?
So your saying you have a Portfolio of $1M and your spending rate is 100,000/year. However this 100k will grow at 5% vs the 2% of Inflation. Correct? I would just determine what the spending rate is now, 10% then add 5%, so 15%. You need to grow the portfolio at 15% per year to maintain the capital base, correct? Am i missing something here. You could do a spreadsheet analysis, but for CFAI exam I dont think that will be necessary :).
i’m not sure of the CFAI take on it. Schwser uses a simple weighted average of inflation effects to come up with a single inflation # to apply to a portfolio. Unless someone can references the CFAI’s application of this, a blended inflation rate is what i’ll be using since i’m not sure what else to do.
Well i know when you have say an Endowment for a Hosiptal and the inflation is 2% but Healthcare inflation is 3% you use the 3% number and not the 2% number and add it to your Real total return to get the Nominal total return.
the question is if you have 2 cashoutflows and they growth at different speed. Strike, will it be 0.5 * 2% + 0.5 * 3%? Which reading can i reference to? bigwilly, yes endowment ect i understand, question is what if 2 streams of cashflows grow at different speed
let me mess this up somewhat…I would agree with striker that using a weighted average rate of inflation makes sense. However, the different inflation rate represent two different time horizon in case of parent need to fund kid’s college expense, so education inflation only last for 4 yrs. So if the total time horizon is longer than 4 yrs of college, the ending required rate of reture will be higher than what was really needed. Agree?? Thx.
ws, you would rebalance portfolio. each time horizon would have its own return requirement. Also, if you can find PV of your expense (College) you can substract with PV from your portfolio and set the post college return requirement on this number
CSK, you will make a great financial planner (seriouly)…me, I am too lazy. 
Yeah I dont think there is any “easy” way to deal with two different cash flows growing at two different rates.
bigwilly but whats the CFAI recommended way?
^I haven’t seen a consistent way of doing so, I hope this is a low probability question for the exam…looking at past exam, didn’t see this type of question coming up, (sounds like I am suffering from representativenss), hopefully it won’t come up.
I dont know…
If i recall seeing one, it would be the CFAI taking out the PV of the say college expenses or down payment on a house from the Capital base and then using that new capital bases to determine the LT required return.
I got the question Schewser Book 6 Exam 1 Morning
go w/ the higher inflation rate and use that to add to the calculated spending rate
what did they say CSK?
not sure about it, but this is what i think: required would be = + spending needs (%) + inflation (%) + current spending needs (%) x growth rate of spending needs (%) For example: portfolio = 10.000.000 previous spending needs = 100.000 spending need (%) = 100.000 / 10.000.000 = 1% inflation = 3% spending growth rate = 5% next spending rate = 100.000 x (1+5%) = 105.000 value of the portfolio to be constant in real terms = 10.000.000 x (1+3%) = 10.300.000 required return for next period = 105.000 + 300.000 = 405.000 required return = 405.000 / 10.000.000 = 4.05% 4.05% = 1% + 3% + (1% x 5%) Anyway, don´t know about you, but I have not seen any problem where spending needs of individuals grow at different rates than inflation When dealing with endowments or foundations, is different, because you always do spending rate + appropriate inflation (which is the growth in prices of your particular spending needs, not overall inflation) what do you think?
Hala your a little confused on what was being asked…first off there are problems where spending needs grows at a different rate than inflation (check old CFAI exams) for instance Healthcare inflation is 3% and overall is 1% for a hospital you would use the 3%. Now what the original question was asking is if you have 2 cashflows occuring each year, one that grows at 2% and the other that grows at 5%…not 1 cash flow but 2. I apologize if I misread your comments and you were addressing both.
bigwilly, you are right, didn´t realize there were 2 CFs. Anyway, I guess we can just solve it doing an example. Although not now, as I have a meeting now with my boss
^What, you have work to do???!!!