Can anyone provide a ‘framework’ for approaching the return objective calculation for the individual IPS? I’ve gone through all the old exams and I get them right sometimes but not with any consistency. There are just so many details, and each time the calculation will be slightly different. Its easy to get it wrong under time pressure. I can see the key is to be very methodical. Does anyone have a method of approaching it that seemed to work across all the sample exams? Thanks!

Follow up: I still working on this. But it looks to me that what might work well is to simply focus on three things and ignore all the extraneous information while trying to work on the return objective. 1) Asset Base 2) Net inflows/outflows (so as to adjust the base) 3) Income Requirement Once you’ve got those three, you should be ok. Just so long as you remember to A) adjust income requirement by inflation one year forward (in some cases) B) Don’t gross up for taxes unless specifically required. C) Remember to gross up for inflation until the end. Any thoughts?

I too would appreciate people’s insight in this area - for some reason I always struggle with return calculations There doesnt seem to be any consistency in the schweser questions in terms of: When to subtract PV of a future obligation from the denomintor How to treat cash outflows that reoccur, but not for the entire time horizon Actually, I guess my problems can be distilled down to: not knowing whether to include something in the numerator or subtract from the denominator of the return calculation… Any advice?

Funny, no thoughts on this. I think its just too squishy or ‘hairy’ a topic to really have a concise answer to. I’ve found the only thing that helps other than, what I mentioned above is to practice the old exams. At least, this may help with pattern recognition.

I’ve done a million of these now and there seems to be no rhyme or reason. I did 03 last night and figured I had nailed the calc, but instead they grossed up the living expenses to before tax amounts, before adding inflation and return desire. So basically I don’t think I could be any more prepared, but clueless nonetheless.

That’s encouraging. For some reason.

on cash flows that recur but not for the time horizon, keep in mind, they are typically asking for a return objective for the next year. so for example, if the investor has to pay a tuition bill in the next year, then that will be in the return objective. for me its always helpful to think that these return objectives are not set in stone, remember Standards say that at least an annual review of IPS is needed and may be warranted more frequently with a change in constraints on the pre- or after-tax, i typically start with how they go about it. so if they tell you pre-tax income but then don’t state an after-tax return requirement, i provide a nominal pre-tax return requirement. (distilled into one sentence: i look at how they start and what they ask for in the question for the pre- or after-tax requirement)

Maybe its in my imagination, but I was sure there are situations in which you PV a future spending requirement and subtract it from the asset base when calculating return. Would we ever have to do this, and if so, under what circumstances? For example, if you’ve got college expenses for a son/daughter, for the next four years, I would PV each year of expenses back to today, subtract from assets, and figure out what % the remaining living expenses were. Add inflation and you’ve got nominal post tax return requirement. -If you add annual college fees to the numerator instead this gives you a return calculation which covers only the next four years. Equally, if college fees grew at above inflation, you couldnt incorporate this effect in the numerator, you would have to use PV and subtract from denominator? A good example is in Schweser Book 7, 2AM, Question 10A, - if anyone has done it, can you explain to me why the $200k start-up fees never featured in the return calculation? And why the $45k is in the numerator?

Robert0s Wrote: ------------------------------------------------------- > Maybe its in my imagination, but I was sure there > are situations in which you PV a future spending > requirement and subtract it from the asset base > when calculating return. > > Would we ever have to do this, and if so, under > what circumstances? > > For example, if you’ve got college expenses for a > son/daughter, for the next four years, I would PV > each year of expenses back to today, subtract from > assets, and figure out what % the remaining living > expenses were. Add inflation and you’ve got > nominal post tax return requirement. This is why you are usually asked only to calculate the first year or the first time horizon. If the payments to college stopped it is probably a delineation point for a new time horizon. > > -If you add annual college fees to the numerator > instead this gives you a return calculation which > covers only the next four years. Equally, if > college fees grew at above inflation, you couldnt > incorporate this effect in the numerator, you > would have to use PV and subtract from > denominator? > > > A good example is in Schweser Book 7, 2AM, > Question 10A, - if anyone has done it, can you > explain to me why the $200k start-up fees never > featured in the return calculation? And why the > $45k is in the numerator?

Just a quick note- CFAI says you always work out an after tax return (p128 Vol 2). They could try and trick you by giving portfolio choices that are before tax. Remember to work out the after tax return use the following formula: [Nominal (before tax return)- (weight of tax free asset*return of tax free)]*[1-tax rate]+ (weight of tax free asset*return of tax free) - inflation Notes: Tax free asset example is municipal bonds Inflation is added onto real returns… not taxed.

Thanks, chovies - where did you find that formula?

You can see the formula in action on page 134 of volume 2 (CFAI). This is part of allocation concepts.

I have done all of the EOC questions from the individual reading and all of the Exam questions going back to 2004, I still have not figured out a “method to the madness”. I did find this thread helpful. With the addition of the tax readings this year, I am just worried that they might get that involved in the return calculation question for individuals. Does anyone here have figured out a format to answer the big “Return Requirement” question for individuals?