I see variations of this throughout curriculum (all 3 levels). For instance, I believe in section about preserving purchasing power of an endowment, we are told to use the spending rate multiplied by the inflation rate to come up with an annual expected return requirement. To me it makes little sense in the above example to multiply them. In other areas of curriculum inflation rate is simply subtracted from nominal rate to get the real return. Any insight here? I guess when we are multiplying we are assuming the 2 rates are being compounded within the same period or something… I’m confused.
The difference is typically small. But multiplicative is always the right choice, additions are approximations.