CFA reading IPS Reading 15 question 2, page 197

Please help I don’t understand the answer to this question. Why 82,500 they treat as nominal and 50,000 as real return

I think they just “assuming”/making a case for a scenario… “if” this was a nominal return (on the portfolio in nominal terms) and “If” this was a real return (we needed to satisfy our shortfall)…then the portfolio would not have generated enough of a return to satisfy the expenses. 7.4 nominal actual return for portfolio and 4.5 real required return needed…then adjust for inflation 7.4-3%(inflation) = 4.4 (real, portfolio) which is less than 4.5 (real, req’d) therefore didn’t make enough of a real return on our portfolio to meet the real return we need/require to meet our expenses? concur? a

Regarding this kind of questions… just don´t think. Perhaps this is not correct in 100% of the problems / examples, but usually: anytime you see a quantity in EUR, USD, etc as the return of a portfolio, that is nominal. They usually use real returns in percentage terms. If the return is in monetary terms, that is nominal. And regarding expenses… You come to what you need every year as QUANTITY A (expenses, in monetary terms, usually adjusted by Inflation, therefore in real terms) minus QUANTITY B (any income you might get). So the number you get when doing these problems is always (let´s better say “usually”) REAL. Applied to this problem, 82.500 is NOMINAL and 50.000 are REAL. So the % you need in real terms is 50.000 / 1.120.000 = 4.5%. But what you actually get is 85.000 / 1.120.000 = 7.4% NOMINAL, that in real terms is 7.4% - inflation = 7.4% - 3% = 4.3% Hope this helps. But take into account that I am at the same stage as you, I started studying 2 weeks ago :slight_smile:

thank you, this helps!