Mr.Good.Guy Wrote: ------------------------------------------------------- > Schweser has it on their quicksheet So according to Schweser I was correct except I can’t type and put (1+t) instead of the blatantly obvious (1-t). Now is there something out there that disputes that, cause I really need to know if there is.
CFAI Vol 2, pg 183 It states Ms. Fairfax has a gross total return requirement of at least 10.8%, based on 3% real, after-tax requirement, 4% inflation, and 35% tax rate. (3 + 4)/(1- 0.35) = 10.8%
Yea!!!
Well, overall this is a contradiction, I am going with the former method as it’s appeared to be sound with most past exams and the basic example case for Individual IPS.
Whats the former method
I am watching AXMEN
James, can I ask a favor because I trust your insight as much as anyone’s on here. Can you provide the formula to which you are referring. I’m looking through both the Ingers and Fairfax cases and can’t find it.
Fine, if you want to drop References… in addition to the INGER case: CFAI Level 3 exam 2002, Morning Session Question 5 CFAI Level 3 Exam 2003, Morning Session Question 9 2007 exam indicated pretax income, but gave pretax expenses so there was no tax adjustment necessary -------------------------------------------------------------------------------------- This is Dr. Khulman’s Method as per his Blog: 1) Adjust expenses for inflation (take them into the future) 2) Divide by asset base (after adjusting for non-investables and liquidity items) 3) Divide by 1-t 4) add inflation. --------------------------------------------------------------------------------------------- Formula is: R/Asset/1-t + I = R/1-t/Assets + I
Thanks…Much Appreciated.
I agree with James that’s the method everyone seems to use. But it is so fundamentally wrong that I can’t bring myself to do it that way. Apparently, CFAI and Schweser live in a world where the first 4% of investment return is taxable, but the next 3% is tax free. And I have the same issue with pension time horizon. I wonder if I will fail this exam by being stubborn.
jamespucyk Wrote: ------------------------------------------------------- > Fine, if you want to drop References… in > addition to the INGER case: > > CFAI Level 3 exam 2002, Morning Session Question > 5 > > CFAI Level 3 Exam 2003, Morning Session Question > 9 > > 2007 exam indicated pretax income, but gave pretax > expenses so there was no tax adjustment necessary > > -------------------------------------------------- > ------------------------------------ > > This is Dr. Khulman’s Method as per his Blog: > > 1) Adjust expenses for inflation (take them into > the future) > 2) Divide by asset base (after adjusting for > non-investables and liquidity items) > 3) Divide by 1-t > 4) add inflation. > > -------------------------------------------------- > ------------------------------------------- > Formula is: > > R/Asset/1-t + I = R/1-t/Assets + I james, here is the quote from CFAI from Ingers case, CFA V2, p.167 “Note: Strictly speaking, the inflation rate should be adjusted upward by the porfolio’s average tax rate. For ease of presentation, we have simply added 3% inflation” This probably explains why in Susan Fairfax case, they actually added inflation and then adjusted for taxes This also tells me that method you are referring to can work, since CFAI used it but this is really a simplification. However, if you read to much into their “…fore ease of presentation” and interpret it that they are introducing a concept, but really telling you this is only done for presentation purposes, then they maybe telling us not to use it this way. Anyway, I think correct formula should be (r+i) / (1-t) or (r + i + management fee) / (1 - t) also all arithmetic terms in the numerator could be done geometrically You can’t go wrong after they make this statement “Strictly speaking, the inflation rate should be adjusted upward by the porfolio’s average tax rate”
I now see where James is coming from, but I agree with TooOld4This and volkovv. This is freakin frustrating. It should be this complicated.
If you think about it logically, you want to be earning r + I after tax, right ? Because after Uncle Sam taken away his portion of your hard-earned money, you want to be left with (r+I). Uncle Sam is not discounting your returns for inflation and then applying the tax rate, is he ? So, why should you ? I think it should be (r+I)/(1-t). If Management fee is tax-deductible(like brokerage commissons), the return should be (r + I)/(1-t) + m If not, ‘m’ should also go inside that bracket: (r + I + m)/(1-t)
in l3 there is so much ambiguity. so many threads end up with no conclusions or simply with ‘schweser got it wrong’ … ‘this is the answer in the cfai world’ … who said l2 was the toughest ? I am just tired of this level 
I agree with you TooOld, but the way I am looking at it, is I’m going to bed borrow and steal every mark I can.
Let me put it this way…I agree with all of you guys… but there are inconsistencies here. The CFAI has calculated it 2 ways.
I WAS AWAKE IN BED LAST NIGHT THINKING ABOUT THIS!!! “I always chose the wrench, cause screw him, thats why”
I had two things buggin me all night… This and what the hell do we use in the denominator for the Breakeven Yield Spread.
Change in price/Largest Duration
another inconsistency i found in schweser … they took the $ amount of expenses increased it by inflation and then calculated the return % (expeses/assets) … and then added the inflation % figure ??? i thought this was only done when you were given last year figures.