HELP! Individual Return Requirements

Hello- See a lot of people on this board that know their stuff. I am hoping one or more could lend a hand. I cannot for the life of me get these required return questions right and its holding my scores in my practice exams below where I would like to see them. Does anyone have a methodical way to attack these problems? A particular set of steps to work through or a checklist? Any help here would be huge! Thanks a lot.

Is there anything specific that you’re stuck with? If you give an example, it might be easier to help.

Is there anything specific that you’re stuck with? If you give an example, it might be easier to help.

Isn’t this just simply calculating the return required for the client to meet his/her yearly expenses?

client port value = 2,000,000 year expenses = 50,000

Return Requirement = 50k / 2M = 2.5% Annual Required Return.

If there’s inflation of say 2% then return requirement will be 1.025 * 1.02 = 4.6% Annual Required Return.

Or am I wrong here?

I always create two categories:

  1. Assets of the client

  2. Liabilities of the client

Assets always include current portfolio (less any immediate payouts not generated by portfolio returns), any inheritances or windfalls, large retirement payments (ie full pension payouts, etc)

Liabilities are expenses, taxes (if apllicable), any payments that need to be generated by portfolio returns

Tings to keep in mind are: #1 if they give you current expenses and inflation you need to adjust for next years expenses (this is the big one) #2 does the portfolio need to keep it’s real value (this is assumed unless specified otherwise) #3 Timing of payments and whether they are needs or wants.

Then just take Liabilities/assets for your required return.

I think even if you miss one or two things, if you set the problem up like this you can still get some partial credit.

Thanks for the help guys. I like this last approach. It seems like I mess something different up every time though. For example I just did the morning session of test 1 in schweser volume 2. I did everything right except didnt account for the taxes as an outflow for his annual income. So close yet so far.