CFAI 2009 Exam Question 1

Why the return on portfolio (4%) is not considered as income after her retirement?

cfaboston28, I think the question gives the fact that Tracys’ portolio has an expected AT return of 4%. Then in Part A it asks the pre-tax nominal rate of return requirement. So one is the expected portfolio return and the other that being asked is the required return of their portfolio.

isn’t 4% on 1m CAD need to consider to calculate this? I mean it is a return she will get from her portfolio and should be counted as her income along with pension income and govt’s social security. No?

I would look at the Q this way… Tracys has a $1M portfolio that offers an expected return of 4%. Each yr. they will receive pensions but there is still a shortfall that needs to be covered by their $1M portfolio. Is the 4% annual expected return adequate to cover it?? By calculating the “required” return of their $1M portfolio, we would be able to find out whether the current 4% expected return is sustainable or not. If not (like in this case), a change of Asset Allocation or cutting of annual spending may be needed.

cfaboston28 Wrote: ------------------------------------------------------- > isn’t 4% on 1m CAD need to consider to calculate > this? No, forget to answer to your Q directly earlier.

4% in addition to other 80K which she is receiving from other sources should be close to satisfy her needs. Do you know any other problem which is similar to this in CFAI text or in any past exams? Thanks