Liquidity requirement

Yes, the usual IPS bullsheet In CFAI 2004 AM Q 2 they have a liquidity requirement which includes a couple of one-off payments. For some reason I thought that the liquidity requirement only meant to apply to ongoing portfolio liquidity requirements - am I just confused and burntout?

Actually in that same question for the liquidity requirement CFAI doesn’t include the fact that their portfolio has to make up the shortfall between income and living expenses of 24k per annum . wtf?

they are so inconsistent. in other exams they do mention the income shortfall! also i have noticed something else. lets say someone wants to purchase a house immediately with a 200 k downpayment. they will not include it as part of liquidity , but just deduct it from investable assets. yet, if the payment comes in later duruing the year, like 6 months after per say, they will include it. is this a general rule that we can go by? if cash is needed immediately for a one time expense, it is not included as part of liquidity?

My understanding is that liquidity requirement should definitely include one-off payments that will occur in the next year or less and you should adjust the asset base accordingly. Ongoing portfolio liquidity requirements can be mentioned, but it’s not necessary, as you’ve probably captured this in your return objective/calculation.

So: - if it’s a one-off payment in the next 12 months, deduct it from investable assets (no problem with that) and mention it as a liquidity requirement - if it’s an ongoing need for cash, don’t mention it in the liquidity requirement? Are you sure about the second point? In the 2009 AM exam they mention the distributions from their portfolio to cover living expenses as a liquidity requirement. They also mention one-offs within 12 months (as per the first point)

Haven’t looked at the '09 exam yet, so can’t weigh in on that specifically. Regarding ongoing expenses, I would probably treat the current year’s shortfall as a liquidity requirement as well and mention it in liquidity and adjust my asset base. And so if I’m calculating a return requirement for next year (current year + 1) I would want my portfolio return to cover subsequent shortfalls and so I wouldn’t view that as a liquidity need - i.e. if I had an 8% shortfall every year, wouldn’t want to hold 8% in cash, maybe some emergency portion but not the full shortfall as that would be a drag on portfolio. Since all we have to go by is old exams I don’t necessarily know if this is exactly right, but this is what makes most sense to me. My impression is that CFAI discloses the model answer, but if you had a couple other bullet pts that were logical and fit with the story you would not be penalized. Not sure how they could deduct pts for saying: “xx will have ongoing liquidity need of $x per year, which should be covered by portfolio return” …again this is my view, no way to really verify this.

as per my understanding, only those payments that have to be made out of the portfolio should be mentioned under liquidity requirements. Those that are paid by cash or current salary - in the near future are not liquidity requirements from the portfolio.

newsuper - in general I would give greater weight to the more recent exams. CFAI only provides the previous 3 years exams for a reason and one of those reasons is because they may have subtly changed some points of emphasis, etc. I think this is what the Schweser guy on the videos said. I would also agree with the general sentiment that only known payments in the upcoming year should be mentioned in liquidity requirements. Would they ding you if you referred to annual expenses as ongoing liquidity requirements? Who knows? But that would probably be more appropriate in the return objective, i.e. “to generate sufficient returns to fund annual living expenses of $N”

righto, thanks guys. I think I’l probably opt for including both ongoing and one-off payments in the liquidity requirement as per the 2009 AM exam.