For required return calculation in IPS, which one is safer to use : arithematics rule or geometric rule or just calculate and put both on it?
If it’s “one year from now,” use the additive method. If it’s a longer time period, use the geometric method.
IMHO, geometric or both. Why bother with arithmetic-only and risk the grader thinking you don’t know the material?
Geometric considers compounding and should be used.
Geometric (i.e., compounding) is better, but CFA Institute has been inconsistent on this in the past: in their published answers to past years’ exams, sometimes they’ve simply added returns (e.g., real return and inflation) and sometimes they’ve compounded them.
I’d compound them, and be sure to write down your calculation.
Pretty sure additive should be used if it is required return over a one-year time horizon, but if it’s multi-year, then geometric , which takes into account compounding, is better. Also if there are going to be cash inflows/outflows (regardless of time horizon), use geometric.