2008 Q4 - return requirement

Return requirement: Earn an average annual return of 8.7% plus management and administration fee of 0.7% I saw the answer took it literally and assumed the required return to be 9.4%. When I did the exam, i got 9.46% by 1.087*1.007-1 of course, all the following calculations get wrong. did any of you guys did the problem in the same way?

I made that mistake too. It’s in the vignette that has to be added.

yes, this was bad question I checked stdev and got>10% (which was max) and than went back to do it 8,7+0,7.

question is will they accept a geometrically lined required return? anythoughts?

I did (1+8.7%) * (1 + 0.7%) -1 = 9.46% The problem is if you use 9.46%, then the corner portfolio weight for 3 and 4 changes to 30 percent and 70 percent. The guide line answer gives 25 percent and 75 percent. Of course, all the subsequent numbers would be slightly different as well. Earn an average annual return of 8.7% “PLUS” management and administration fee of 0.7%…does the word “plus” suggest we should simply add? Any thoughts? Thanks.

I only asked bc there was a post floating around on how they would grade the morning. And if I remember correctly, the guy said that if your answer in part B would have been correct if had you gotten part A correct then you get the points. I took that to mean even if we got the required return calc wrong, as long as everything else checks out in part B, ie we have the right formulas etc, then we would get points. Not sure if that is true…

I remember somewhere says both calculation methods are acceptable.

For anything related to individuals add, for anything with institutions use geometric.

In the 2005 exam - there is a corner portfolio question (Q3) where they say the return requirement is 7.5% spending rate plus a management fee of .6%. In the guideline answer they show it for 8.1 and 8.145. So it looks like they would accept either.