Why do they calculate the multiplicative return like this:
required spending = 6% inflation = 3.5% management fee = 0.4%
Required nominal return = (1 + 0.06 + 0.035) * (1 + 0.004) - 1 = 9.94%
They add the inflation?
Why not do this:
Required nominal return = (1 + 0.06) * (1+ 0.035) * (1 + 0.004) - 1 = 10.15%
please check the answer key
Therefore: Nominal return requirement = (1 + 0.06) x (1 + 0.004) x (1 + 0.035) – 1 = 10.15% (multiplicative method) OR Nominal return requirement = 6.0% + 0.4% + 3.5% = 9.9% (additive method) OR Nominal return requirement = (1 + 0.06 + 0.035) x 1.004 – 1 = 9.94% (calculation method, reflecting exact timing of cash flows)
All 3 methods are accepted …
^ true. overlooked my answer. thanks
ashamed by 1,000th post was so stupid
no issues you have your exam in less than 1 week (I have all the time in my world now).