# 2009 Essay Q1 Part 1

I have a question on Part A after looking at the CFAI guideline answer on the pre-tax nominal reate of return: The net income needed (after-tax) is \$45K. Then CFAI instruction grosses up to pre-tax instantly before adding the inflation rate in the last step. However, my understanding is to calculate the inflation-adjusted after-tax return first, then gross up to the before-tax return. Would someone please help me with this puzzle? Thanks in advance!

I think this would over-state the return requirement: Portfolio needs to generate \$45K after-tax at age 60. After-tax return requirement: 45/1,000 = 4.5% + 4% expected inflation = 8.5% required AT return. Then, pre-tax would be 8.5% / .8 = 10.63% This assumes you need to gross up the expected inflation to a pre-tax figure… however, it’s double-counting because you’ve already inflated the one-year’s expenses by expected inflation of 4%. Not sure if this is where you were going?

got 10.68% me , too. I adjusted for inflation then accounted for taxes … was really frustrated when I saw that CFAI proceeded in the opposite way, this takes 10 points out of my score :(( guys, I remember having seen questions where they adjust for inflation before accounting for taxes, please correct me if I ma wrong… Thanks, M.

Please do - let’s keep this one near the top

James@Houston, TKVM for your action taken. I originally plan to send inquiry to CFAI tomorrow. Please surely post CFAI’s reply here. I have been stuck by this confusion so such a long time !

AMC, No problem! Will post once it is received. Really appreciate your effort in the discussions earlier. Lots of us here deserve a clear CFA answer while studying so hard.

This was discussed quite a bit after the exam. I had 10.85 (mulitplicative) or 10.63 (additive). I scored highest in that section, so I’d be surprised if their released answer key was correct…I suspect the answer key they provided was not the same answer key graders used. Here is the post exam discussion: http://www.analystforum.com/phorums/read.php?13,1003718,page=1

I think the difference depends on whether capital gains and income is taxed or just income. If its both then include the inflation in when /(1-T). if its just income then add inflation after dividing the real return by (1-T).

don’t want to beat this to death, but this has been explained before http://www.analystforum.com/phorums/read.php?13,1127642,1132653#msg-1132653

James@Houston, TKVM for the post of CFAI’s reply. Its very bad that I almost forgot what we have been discussing. I am quite frustrated by the fact that I can not retain much of the exam material studied. I must look into this question/issue again ! Anyway, TKVM !

elcfa and AMC, TKVM for analyzing this issue all along!

elcfa Wrote: ------------------------------------------------------- > don’t want to beat this to death, but this has > been explained before > http://www.analystforum.com/phorums/read.php?13,11 > 27642,1132653#msg-1132653 I guess CFAI guys stole elcfa’s idea of TDA. They replied James’ email days after his/her post.

Just bumping this because I lost track of it and forgot that James was going to give us a reply. So, to summarise: - if it is a TDA, then you convert the after-tax amount into the pre-tax amount and then adjust for inflation - if it is not a TDA, you adjust the after-tax amount for inflation and then convert it into the pre-tax amount Does that sound correct?

> > - if it is a TDA, then you convert the after-tax > amount into the pre-tax amount and then adjust for > inflation > - if it is not a TDA, you adjust the after-tax > amount for inflation and then convert it into the > pre-tax amount > > Does that sound correct? Yes, per CFAI way. I still argue that you need to do the second method for both types of account, but let’s not spend more time on this.

I agree with you elcfa, but let’s suspend reality for three weeks and make sure we pass this damn thing

elcfa, James@Houston & others, I just revisited the question & CFAI’s reply. I don’t think most candidate will assume that “the Tracy’s portfolio is a tax-deferred portfolio” on the exam because no explicit indication about this assumption. Acually, I found CFAI was not so seriously in writing the exam. 2009 AM Q2 is another example, I could not find the terms of “implied assets / liabilities” in 2009 curriculum at all. On the other hand, I found the CFAI’s curriculum is not well organized and systematic. There are many overlapped topics with different terms/denotations/expressions and many statements are vague which cause very much confusion, especially in L3 curriculum. I hope you will pass the forthcoming exam and do something to improve it after your becoming a charterholder and thank you very much for sharing your opinions.

Reading Sponge_Bob’s thread from 2009… if people log onto AF at the lunch break on June 5th and discuss answers from the am section, then is helping out others?! This has probably been discussed over and over… but it just occurred to me (new to AF this year). Anyway, I’m sure people are sick to death of talking about problem 1b) from the 2009 exam.