So working this problem Volume 2 pg. 207 and it says that Christa wants to keep aa emergency cash reserve equal to her annual living expenses. Then in the retun calc it leaves that money in her portfolio. Should the reserve not be stripped out for the return cal purposes…
Also in their answer the number they seem to come up with is nominal for some reason and they subtract inflation…lost there as well.
Thought I had this stuff nailed until I revisited this question. Thnaks for the help.
the cash reserve still be kept in the portfolio, continue generating return…it should not be stripped out (mentioned somewhere in GIPS). The amount only effects on the allocation and/or liquidity needs…
For your 2nd q , please read carefully .
They give the inflation and want you to give them a real rate from the portfolio. The portfolio always generates only a nominal return in CFA land.
1.Requirements are always real-rate .
Now look at the question again
Sorry I don’t understand why calculated 7.4% is nominal term… In the solution of the qustion on page 213 of volume 2 book, it says “Her required real return, if she reduces her spending by combining her apartment and stuido, is EUR50,000, or 4.5%.” Is this also nominal rate although text explicitly says real rerutn??
I really appreciate someone’s help on this.