I think the required return is (180,000 – 100,000)/1000,000 = 8% + 2% inflation…ideally geometic. (1.08)(1.02) -1 = 10.16%. You seem to say Part 2 requires picking the best portfolio to invest. I dont think we have all the information here but my guess is that if this is the only information provided, the portfolio to choose will be less than average risk tolerance, low return – more cash, bonds etc….as the income is less than annual expenses and the investor relies on the portfolio to meet personal expenses.
How will it differ if the pension income also increases with inflation ? and
What’s the significance of this statement “Mueller’s don’t mind invading their principal” - is it just increasing risk tolerance ? but then Muller is also relying on this portfolio to meet his expenses.
I asked in another post but I think it’s relevant here. Q13 ii of same reading 9 EOC.
Information provided: Income increase fully offset expense increase. Return = net CF / asset base. The solution states ‘no need to adjust for inflation’ for return. It doesn’t say if this return is nominal or real.
So my question is that calculated return 7.38%) is Nominal or Real? I think Nominal. If it’s nominal, does it mean to calulate real return, I’ll need to deduct inflation? Thanks!