Language of AM Return Calcs

Looking for clues in the language of the CFA return calc q’s

What I have seen is :

  1. Any period less than a year, or “end of this year” is a current cash flow

  2. “Next year” or “one year from now” happens in the next year

This may seem obvious, but I threw away the Schweser live mock am test because they messed this up in the rerun calc. Worthless.

Also, whatever year you calculate the spending need for is always divided by thr previous years asset base.

Typically, they are set up as next years spending divided by current years assets, but the 2005 year was set up as spending needs two years from now divided by next years assets

I just recognize that the calculation has double inflation effect on expense. ie, the inflated next year exp used to calculate real required return. The return then add inflation rate one more time to get norminal rrr…

However, dont be confused and forget it…

what did the schweser mock screw up with this language? i thought they were pretty clear…

Bonus payments. In one year should have meant it happened next year for eunice, not in the current year. Same for mark. If you applied Schweser’s methodology to the 2005 yeo case, you would not get the guideline answer…

I have really tried to mentally reconcile these return calcs, and the Schweser calcs are just different than CFA.

how is it different? the bonus for eunice is received when she retires, in one year. this is synonymous with “current year”. current year = this coming year. so it is put at the end of the first coming year but IN the current year. putting it next year would be wrong because the inflows and outflows for next year are to be divided by the net investable assets at the START of next year i.e. the END of current year.

similarly, mark’s bonus is recieved at the end of next year. you add it to net investable asset base at retirement, so that is the middle column. it needs to be included in the denominator for when you calculate first year of retirement expenses divided by next years net asset base.

similarly in the 2005 case, she is receiving the retirement bonus in one year when she retires. you dont add it to the second column right? you add it to the first column: “one year from now.” this way, the expenses in first year of retirement are divided by her net asset base at end of year before retirement. think (expenses)1 / (net asset base)0

maybe just the labelings of the columns are different/confusing? mock exam calls it “current year” but 2005 case calls it “one year from now” but its the same thing.

i think everyone jives, let me know if you dont agree.

You’re the man. I have been confused with how I am thinking about this, and I appreciate the clarification.

Agree now that “in one year” means end of the first year. I had been reading that as the begininning of the second year.

So current year can be phrased as: “end of this year,” “current year,” “in one year,” or “in certain # of months.” Any other key phrases?

Spending need would be “next year” or a current need that is ongoing (either grown by inflation or not).


to me, “next year” also means in the coming year. theres no magic formula or key words to memorize. you just have to think about what is giong on. the two things that help me most when there are numerous years going on are a) draw a timeline and b) always remember that expenses 1 / assetbase 0. remember–the return can only be earned on the asset base at the beginning of the year.

Look at the 2008 case. They say ‘in one year’ to refer to something in next years spending need (mtge payment).

whats up with that?

avoiding this test completely till next week…heard it is the toughest of the last 4 years…will be sure to get back to you then

2010 is the toughest one!