CFAI Exam 2011 - Question 2 (Individual/Becker IPS)

CFA Level III Portfolio Management
#1

Hi all & good luck come 6/7

Question here re 2011 CFAI exam, question 2, Part c

Why is the Liquidity constraint $3,859,500?

The $3,650,000 is obvious (debt repayments)… but why do we add the $209,500? Isn’t that the return requirement/don’t you leave that out???

(For those that don’t have the exam in front of them, the situation is as follows… the Becker’s are retiring & need $257,500 per year in living expenses… Mr. Becker receives $48,000 in pension… so the net shortfall = 209,500)

If you DO include the shortfall of 209,500 in the liquidity constraint, don’t you have to reduce your investable asset base in Part A when determining the return requirement?

Would appreciate any help.

Thanks

#2

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#3

cfa_student: did you mean to answer this?

#4

Personally, I like to include the required return/spending/expenses as a liquidity need, in addition to the major withdrawals (pay off house, debt)… but from what I understand, if you have already included the dollar amount in the required return, it is not absolutely necessary to include it in the liquidity section. The answer you see is the CFAI’s “full text book explanation” and you probably would receive the same credit with or without it.