Schweser Mock Exam #1 AM Answer to question 1-C makes no sense

We calculated the required return in 1-A to be about 11%. Therefore, how is it right for the allocation in 2-C to be all stocks and bonds that return 8.5% or less? Don’t we have to meet the return requirement!??!

I meant to say:

Therefore, how is it right for the allocation in 1-C to be all stocks and bonds that return 8.5% or less?

I haven’t seen the exam, but generally the questions stand alone. They won’t penalize you on question 1-C for getting the incorrect return requirement on question 1-A; they’ll generally specify the return on 1-C. (And it won’t be the correct return for 1-A.) I’d check to see whether they did that here.

215, mate 11% was pre-tax nominal return. The after tax nominal return was around 8.52% (if my brain serves me right)… So there should be no confusion.

Please stop posting the answers to mock exams in the title of your question. Its like me posting the ending of a new movie in the title of a review. If you already paid for the ticket.

Soylent green is made out of people.

Isnt it easy mate to stop looking at the thread, because the thread clearly says he is checking something on the answer. While I will make sure, I dont do it - just thought it could be easier for you as well. Cheers and apologies.

Not if you have a photographic memory. Its just common courtesy like flushing or fatties in speedos. Sure you have the right to, but most people cant unsee something.

To be fair, nothing in his title hints at any answer - only that he doesn’t agree with it. Surely you won’t get points for writing “makes no sense” on the exam.

Just don’t click on the thread.

I am confused about the required return calculation, since inflation is not taxed, the required return should be 5.02%/(1-25%)+3.5%(inflation) rather than in the answer sheet which is (5.02%+3.5%)/(1-25%)

Anyone echo?

Regardless of pretax return, to preserve the purchasing power of the portfolio you need to keep pace with inflation after tax, not before. Thus, increasing the after-tax real return by inflation before grossing it up ensures you do so.

  1. I didn’t post the answer in the title…

  2. The answer still makes no sense

Sawption11 thought that you posted a multiple choice answer… As in: the answer to 1 is C.

Sorry thats what i get for being on AF at 3am. I believe this calculation is one that has “evolved” over the years depending on what year you are looking at. I made the same mistake. I believe the intuition is that your nominal income must grow with the inflation rate and then you are taxed, not your after tax income must grow at the inflation rate. Technically, your growing nominal income would be taxed as well since the taxing authorities would tax anything you bring in, not anything you bring in compared to last years baseline. If I make 100k one year and at a 30% tax and get a 10% raise, the next year I will be taxed at 100k + 10% =110k * 0.70. Not 100k * 0.70 + 10%.