so. let’s say you have a liquidity requirement in 1 year. it’s a lump sum. what do you do with this? i left it in the portfolio in cash, but still as a part of the total asset base. apparently you’re supposed to take out the present value of the sum and take it out of your asset base? i could have sworn that we addressed this differently in a different question.
I’m pretty sure it depends on the circumstances. For example, if it is an expense that is covered by income, you obviously will not touch the portfolio. If it will occur immediately from the portfolio, take it out now, if within the year, discount it back to now. If in one year, I’d be careful. I’d discount it if I am using today’s portfolio at time 0 to develop my required return. But, if we are taking the portfolio forward one year to determine the required return at time 1, I’d just subtract it from the portfolio at time 1. Does this kind of make sense? They set these things up an infinite number of ways and I guarantee what we see on the exam will be a whole new scenario we’ve never seen before. 
Schweser (seen it several times) has you take the PV of the outflow out of the portfolio. I can’t remember if I’ve seen the same thing from CFAI texts.
i should have seen that thread, mwvt. sorry to double post on the same issue. i will check it out now. but i swear i saw cfai question where we just held the amount in short term instruments…
I don’t care about the double post! I just want to get to the bottom of this crap.
i don’t know the right answer. i know schweser wants you to take out the pv but i’m not convinced at all that cfai would want the same thing… this is pretty shtty.
I would buy a 1 year note. Better return than cash and you have the liquidity when required.
right. but whether you keep it in cash or a different short term instrument, the question i have is whether the amount is kept in the portfolio, as part of the asset base to get the return requirement or the pv is taken out from the beginning…
i’m not sure that a 1 yr treasury yields any better than cash anyway.
I think 1 year out or less is fair to subtract it…yes you can buy a 1 year note, but it is really a distraction to what is usually otherwise a long term portfolio. You aren’t really adding value to managing a 1 year investment that needs to be safe and liquid…set it and forget, thus don’t bother including in the plan.
cfasf1 Wrote: ------------------------------------------------------- > right. but whether you keep it in cash or a > different short term instrument, the question i > have is whether the amount is kept in the > portfolio, as part of the asset base to get the > return requirement or the pv is taken out from the > beginning… Put it in the portfolio and take note of that in the Time horizon => Multistage and Liquidity constraint => Greater
Sponge_Bob_CFA Wrote: ------------------------------------------------------- > I think 1 year out or less is fair to subtract > it…yes you can buy a 1 year note, but it is > really a distraction to what is usually otherwise > a long term portfolio. You aren’t really adding > value to managing a 1 year investment that needs > to be safe and liquid…set it and forget, thus > don’t bother including in the plan. I would agree with anything due in less than 1 year. 1 year starts being borderline.
I believe his original question was w/respect to total asset based used for the return portion.
yep. i said leave it in the portfolio, but keep enough in short term instruments to cover in 1 year. (it was exactly a year out.) i thought that was the cfai answer. but schweser thinks differently. i gave myself 0 points for this on a question and it pissed me off.
cfasf1 Wrote: ------------------------------------------------------- > yep. i said leave it in the portfolio, but keep > enough in short term instruments to cover in 1 > year. (it was exactly a year out.) i thought that > was the cfai answer. but schweser thinks > differently. i gave myself 0 points for this on a > question and it pissed me off. I’ve also seen situations where there’s a substantial expenditure within the year and they’re asking you to determine the portfolio allocation to cash with the correct cash allocation being like 1% w/ the logic being that you can sell liquid securities to cover the expenditure (consistent w/ total return approach). This stuff is driving me nuts… What question is this specifically?
in the past CFA exams, the only case i’ve seen similar to this is when the IPS is considered after one year. eg retires in one year, aso. there you had to calculate inflows/outflows and substract/add the net to the starting portfolio in one year. then go for the return. other than that, IMO, an outflow within one year should only touch time horizon and liquidity constraint… and get covered by money market funds in the asset allocation problem. at least that’s what i saw in CFA, not Schweser. please feel free to comment
^^Agree