# Return calculations SS 4

CFAI 2008 exam Q # 1- Return calculation in part D- inflation was not added Vs. 2007 Q 1 Part D- inflation was added?!! Why is this discrepency? What are you supposed to do on the exam?

2007: it says clearly that the terminal value of the portfolio needs to be adjusted for inflation: “They wish to maintain the purchasing power … in today’s dollars”, therefore you need to add inflation to the required return. The on going cash flow needs also needs to adjusted for inflation.“Ingrams expect that their inflation-adjusted expenses will remain constant during retirement” 2008: both ongoing cash flow (mortgage) and terminal value is fixed in nominal value, not in today’s real dollar (Oliveira calculates they will need a portfolio value of BRL 15,000,000 when they retire in order to support these goals.) Therefore there is no need to adjust (add) for inflation.

Thanks for your explanation-also same q for Maclins-why the inflation was accounted for in PMT ? I got it wrong because of that.

Maclimes was 2004 q Also, when calculating rr, the shortfall for living expenses was after the taxes, while inflation was added to 4.47% ( I got tht) to 7.38%?

derswap07 Don’t have the 2004, but there is a Maclins in the CFAI exercise 13 reading 14 with the same answer 7.38% so I assume it is the same case. p 167. In this case, there is no inflation adjustment since the text says: on going cash flow: after tax salary increases will offset any future increase in living expense --> both real increases and inflation. Further on, the answer notes: no inflation adjustment is required in the return calculation because increases in living expenses will be offset by increases in Christopher’s salary, terminal: they need 2M in 18 years. No mentioning at it will be in today’s real dollars or that amount should be adjusted for inflation. Hope that it is clear

Thanks. This means that I should pay more attention to the case- and whether it’s specifically mentioned there or not. Correct?

right. Nuances are key in level 3

right. Understanding nuances, esp in creating the right investment strategy is key in level 3