So, if you are not told to use “compound” return, how do you know when it is appropriate to use additive, versus multiplicative returns… eg. if you are given 5% spend rate, 2% inflation, 2% mgmt expenses, how do you know if the answer is 9%, or [(1.05)(1.02)(1.02)]-1 = 9.242% Normally it is an insignificant difference, but I just did a practice test where they have you pick an appropriate asset allocation, and the two that have the best sharp both have a return that is right on the border, it would be met if you use additive but not if you use multiplicative. The answer ended up being the allocation that had the higher return, as it referenced multiplicative return requirement (though the question never stated anywhere to “compound” or anything of the sort) On a separate topic, has anybody found the Schweser practice exams exceedingly difficult and very narrowly focused? On the past lvl 1 and lvl 2, if you took a practice test you covered most of the curriculum, however on this one, at least for Schweser, they go off into the weeds and create entire essays over very narrow topic ranges (eg adjusting WACC for pension assets was a 3 page essay). The end result is that even after a full test, morning and afternoon, you may have covered still a very small portion of the curriculum. Maybe this is how the real thing is, i don’t know, but i just can’t imagine being grilled over a topic that is suppose to have such small representation to the extent they do… i can’t count the number of times an entire essay revolves around “listing due diligence items for hedge funds, or private equity”, or describing freaking advantages and disadvantages of NCREIF real estate benchmark versus NAREIT…
Assuming an essay question, in regards to IPS my instructor told me not to get too hung up on multiplying vs adding. They are looking more for process and demonstrationi rather than exact calculations. Afternoon session is a different story… Yeah, I remember taking Book 1 AM a few weeks ago and ran into the due diligence question. Caught me completely off guard, and I still don’t have it memorized yet.
That was the final exam of book 2, 2010. I have finished Book 2, haven’t started book 1 because the guy who i bought it from wrote all over it in pen, so im gonna have to find another copy. I remember in the past people always said book 2 was far more difficult, wonder if thats the case here… As far as the DD questions, small stuff like that is littered ALL OVER the Schweser tests, they grill you on the details of small stuff, I am petrified now of running into that. I know that generally you shouldn’t get hung up, but the fact of the matter is that in this situation, one asset allocation was either right or wrong based on that decision to multiply or add. It is fairly common to see asset allocation options in tandem with IPS return requirements, so I want to make sure I get this nailed down. I know what to do, I just don’t know what they are looking for unless explicitly stated.