reading 38: Risk management/Private Wealth: the Schmitt family (

CFA Level III Portfolio Management
#1

CFAI book 6, page 339, in the “Schmitt family” case.

At age 45, I fail to recompute Paul’s and Jessica’s human capital in the economic balance sheet.

CFAI shows Paul’s human capital = 798,000 and Jessica’s human capital = 1,093,000

Inputs:

Jessica salary before taxes = 80000

nb periods = 20

Salary growth=5%

Discount rate = 3%

Risk adjustment=1%

I compute adjusted rate as (1+discount+risk adjustment)/(1+growth):

for jessica adjusted rate = (1+3%+1%)/(1+5%)= -0.95%

PV for Jessica=PV(-0.95%,20,80000,1) as annuity due in excel = 1,754,941

then multiply by 92% probability rate (given in the text)

HC for Jessica=1,614,546

Is anyone able willing to help? Is the HC based on the after-tax salary? Or does the CFAI use a different mortality table (ie a % different from 92% at each period)?

#2

Use 53,650 instead of 80,000.

#3

thanks, I get a result of HC 1083755 for Jessica, close enough :slight_smile:

Thanks!

In the same example, page 344,“need analysis method”, I am not able to recompute the PV of survivor’s income:

For Jessica: CFAI shows 777,000 for PV of survivor income

periods=20 (currently age 45, until retirement at 65)

adjusted rate=(1+discount 3%)/(1+nominal increase 1%)-1= 1.98%

after-tax salary: assume 53,650

PV(1.98%,20,53650,1) = 896,337

Could you review my numbers?

Thanks

#4

That’s off from my number. Try this.

END Mode

PMT = 53650

FV = 0

N = 20

I/Y = -0.95238095 (It works with -0.95)

[CPT] [PV] -1,187,914.944

Then 92% × 1,187,914.944 = -1,092,881.748

#5

I think you misunderstood the context of “survivor” in this case.

For the column on Jessica, if she dies today, the survivor is Paul , hence the PV of survivor income is computed as:

BGN mode (Annuity due)

PV = 46,510 (Paul’s after-tax income)

I/Y = 1.9802

N = 20

FV = 0

[CPT] [PV] -$777,049

#6

Thank you for your help!

#7

How did you get the same number for Paul’s HC ($798,000)
Here is what I did:
END Mode
PMT = 46,510
N = 20
I/Y = (1.03/1.02) - 1 = 0.98%
FV = 0
Then I got a PV = 840,991.212
92% * 840,991.212 = 773,711.91

I will be appreciative if you can show me your calculation! Thanks!

#8

I got the same number as you. Can anyone explain this ?

#9

Magician??

#10

Hi,

May I know for Paul(Jessica is survivor)? I can’t seem to reach 824,000
PMT=53,650
N=20
Adjusted rate used =(1+discount 3%)/(1+nominal increase (-2%))
PV=696,776

Am I missing anything?

#11

Mode: BGN

PMT = 53,650

N = 20

Adjusted rate [I/Y]
= (1 + 3% discount rate + 1% risk adjustment)/(1 + 1% growth) - 1
= 2.9703%

FV = 0

[CPT] [PV]

#12

Thanks a lot fino_abama!

1 Like
#13

You’re welcome :ok_hand:

#14

@Ericl
Have you been able to recompute Paul’s HC (798k)?

#16

Nah, still the same number I got before. Any idea how I might get this wrong? Or it’s just some “Significant” rounding for the computed value

#17

To everyone, including EugeneNYC, make sure your number of periods (P/Y) = 1. I was getting funky numbers because my periods were not 1.

1 Like