Etienne Wrote: ------------------------------------------------------- > Definitely below, in my opinion. > > The argument that they could pay cash for the > house does not fit with their objectives… they > need a c.5% real return from their portfolio OR > ELSE… > > Furthermore, this family has assets 995k… they > are not rich. OR ELSE? Or else what? They live on the streets? No! They pay their mortgage off and still have money left over. Their assets are worth more than their mortgage which is the only debt it seems they have. Their living expenses are completely offset by their salaries and it expected to remain that way for the foreseeable future. They will be receiving another 750K in 10 years. I highly doubt their portfolio would be gone in 10 years even in the worst case scenario. The portfolio only has to provide their mortgage. It is easy to get caught up in what ifs but CFAI doesn’t want you to do that. They give you the facts. Don’t make it more complicated than it is. Just look at 2006 and see their explanation. It is essentially the same case. These people don’t “need” a 5% real return. They want a 5% real return so that the real value of the portfolio stays the same. They aren’t going to sell their house if the earn 4%.
They needed 9.4x% just to maintain the (real) portfolio value. I really think that’s a strong argument for a low risk tolerance.
Jed Wrote: ------------------------------------------------------- > They needed 9.4x% just to maintain the (real) > portfolio value. I really think that’s a strong > argument for a low risk tolerance. Take a look at 2006. The exam did the same thing. It asked for 2 reasons for below average ability and 2 reasons for above average ability and then circle overall ability. The guy needed a real return of about 5%. I don’t recall if inflation was given. He had no external income. He lived off his portfolio. He was 35. He had above average ability.
Further - their income didn’t cover their expenses. This is misleading. It covered their expenses when they lived with their parents. Going forward, they had a mortgage payment which becomes part of their living expenses.
The portfolio only needed to provide the mortgage. That was clearly stated in the case. Call it living expenses or call it a mortgage. The dollar amount is the same.
Below average infinity. Ha ha - OK, I really don’t know at this point. I still think it is below, but I haven’t compared vs. the old cases, so you may well be right.
Jed Wrote: ------------------------------------------------------- > Below average infinity. > > Ha ha - OK, I really don’t know at this point. I > still think it is below, but I haven’t compared > vs. the old cases, so you may well be right. Yep, we won’t know until they release the exam in November and hopefully none of us cares anymore:) If I pass, I will never look at CFA exam material again!