i am sure this has been discussed before, but i am running behind, tired as hell, etc, so humor me if you would. i thought the major debate about return calcs was arithmetic vs geometric. i used geometric on the first question in the 2007 CFAI exam (the Ingrams) and made all the correct adjustments (even according to the answer key, which is basically a miracle), and came up with 7%. CFAI used BOND MATH (WTF?!) to come up with their return of 7.34% or 7.46%. i have never seen this before anywhere. do they just make stuff up now for the answer key? please tell me that we are not required to do this.
It does make sense if you think about it. That’s why they have added their little proof. The difference is that the costs have already been inflation adjusted, so doing it geometrically means you would end up doing it twice.
so is this required? this is not in the reading or schweser (haha, for what it is worth).
It was last year, so I’d be prepared…
so is this consensus? people are planning to use this method?
Just did 2007, and got thrown for a loop. But when I did all the readings months ago I wondered to myself, why don’t they do it this way? Problem is, there are 3 errors in their solution: 1. They assume that the $3m donation to charity is a sure thing. Later in the solutions, they admit that it’s not. Well if it’s not, and if it’s 35 years away, why are they effectively pulling it out already? It’s inconsistent thinking. (BTW, that’s what the bond math is actually doing, reducing the principal by the p.v. of $3m inflation adjusted.) 2. They use a 35 year time horizon based on Caleb “crystal ball” Swann’s assumption. Apparently, neither Caleb nor CFAI bothered reading the SS that talks about life-span vs life expectancy. Hmmm…I guess poor Jack will figure it out when he’s still alive, 45 years later, and running out of money. 3. The bond math is simplified because the correct calculation requires either a spreadsheet or a recursive calculation (which will get you about 7.3%). I’m nitpicking, but hey, if you’re going to go to the lengths of introducing a concept that’s not in the readings, at least do it correctly. I concur – AARRRGGGH!
Sorry, I got your question confused with the 2005 exam. Ignore me.