Book 3, Reading 26, Page 337, Question 19 Question states that the foundation has an annual spending requirement of 5% “Annual spending must at least meet the 5% of market value requirement, but the committee is unsure how much higher spending can or should be. The committee wants to pay out as much as possible because of the critical nature of the research bing funded; however, it understands that preserving the real value of the foundation’s assets is equally important in order to preserve its future grand-making capabilities.” Then, in the chart forecasted inflation is 3.5%. Thus… shouldn’t R® = 8.5%? Yet in the answer, CFAI uses an “Expected Real Return of 5.805%” as an acceptable answer. Anyone else notice this?
Expected REAL return means the return has already been subtracted inflation --> its nominal return = (1+5.805%)*(1+3.5%). A general comment aside: level III material has been quite stable over several years with little new material so it has been read (and reread) by (tens of) thousands of candidates. In particular, the end of chapter questions are in particular heavily scrutinized so chances for any obvious mistakes there are quite small. Not say that it does not happen, but chances of obvious mistakes not seen by candidates from previous years are small, so if you spot any obvious ‘mistake’, chances are higher that you misunderstand.