- On pages 114 and 115 it shows the return calculation. Exhibit 4 shows that the trust payment increasing with inflation, so why do you need to add the annual inflation rate to the needs in year 2 / net investable assets at the end of year 1? 2. On pages 131-132 with the Fairfax return calculation, where does the $658,000 on the top of page 132 come from? I understand the numbers before it

To clarify on question 2 I posted. Isn’t the return objective given in the problem? (3% real, after tax). Why are you calculating the return needed on the total assets when you assume that the closely held stock doesn’t change in value?

Also, with regard to the risk objective, how do we know that 10% nominal loss in a 12 month period is below average? What is considered average and above average?

This is a pretty important topic. Anyone have any input?

Part 1) Trust payment is increasing with Inflation each period. That is correct. Year 1 Cash Flows of 39,540,437 also includes Inflation for the Same Trust payment portion). Based on that - it is a real return… (since both numerator and denominator are inflation adjusted). So to get to the nominal return you need to adjust up by inflation. Part 2) your answer is at the bottom of page 131 658000=500000*(1.04)^7

The below average vs. above average is a play between the ability to take risk and the willingness to do the same. This 10% is based I believe on the answer to the question that Peter is asked … how big a shortfall can his portfolio bear without jeopardizing the major short term and long term investment goals… in light of a) His ability to take risk so it is a subjective assessment.