if you have seperate return reqt… say 2% living exp, 4% education, and 1% medical… education inflation rate is 5% and the rest is 2% … how do you incorporate this into a return reqt number… schweser has similar ques… vol 1 exam 1… can’t get their calculation
My guess is: Value of assets = 1000 medical expenses = 100 = 10% x 1.05 Other = 100 = 10% x 1.03 sum of the two…maybe not.
what i thought was … lets use geometric linking… and individually use the inflation rates 2x 1.02 4x1.05 1x1.02 and then geometric link them… put the problem is i don’t get the right answer… its not off by much so ordinarily i wouldn’t care but it caused me to reject the correct portfoilio allocation choice. schweser has completely disregarded the individual infation rate and applied a general inflation rate to all… which i think is wrong…
you have to take weighted average. if the total expense is 200k and out of which med exp is 50K, then you have to take 0.25 times the infl for medical. same way calculate for other expenses and add them all to arrive at one particular infl figure.
krishna1 Wrote: ------------------------------------------------------- > you have to take weighted average. if the total > expense is 200k and out of which med exp is 50K, > then you have to take 0.25 times the infl for > medical. same way calculate for other expenses and > add them all to arrive at one particular infl > figure. why? this seems wrong… i have a 50$ in expenses… they grow at 4% … not by .25 i.e 1%…
it is the proportion of medical exp out of the total. in the example I used, it is 50K out of 200K so the factor is 0.25
this has been discussed at length before. The actual calc is pretty complicated but Krishna’s method is a good approx.
TooOld4This Wrote: ------------------------------------------------------- > this has been discussed at length before. The > actual calc is pretty complicated but Krishna’s > method is a good approx. it has? i did a search but i found nothing… the link or perhaps a keyword to search with… i can’t seem to locate it
found it … thank you
The way the CFAI did it on one of the past exams (2006) was (to find 1st year aftertax RR) was take the education exp. and others and take them a year ahead by their respective inflation figures, then come up, based upon the asset base, the RR, before inflation then add the general inflation figure.