Is 6.8% return on page 194 of CFAI pre tax real return?
Yes, it is a pre-tax real return, which made no sense to me either. The narrative doesn’t address the tax issue properly.
In reality, she should require a return 10.46%, which is 6.8%/65%., if the 35% tax rate is to be covered.
this apparently was a old 1996 case from the Level III exam, and at that time the curriculum was not where it is today in terms of Pre-tax/Post Tax development.
The case apparently gave the return in the one statement in the paragraph and gave 1 point from answering the question with regards to retrun required.
actual pre-tax return should have been:
she requires 3% after tax. 4% is the inflation.
So 1.03 * 1.04 / (1 - 0.35) = 10.95% - would have been the actual pre-tax return, per today’s curriculum.
3+4=7 7/0.65=10.77 ~ 10.8 as given in the text . Either answer should be ok if supported
What also threw me was why a return requirement was being stated for the later stage. I thought that a numerical return requirement was only relevant to the stage in which an asset allocation strategy could be developed.