Is it just me or do CFA and Schweser seem to work out expected/required returns using different conventions at random? E.g. Required spending = 5% Inflation = 3% In some cases they seem to simply add them and say the required return is 8% and in others they multiply (1.05)(1.03)-1 = 8.15%. Some of the questions seem to deliberately use this as a trick, e.g there is a portfolio with a return of 8.1% and you need to decide if it is appropriate or not. Is this the case or have I been studying too much today?
either one is fine, just pick one and go with it. Personally, I just compound since it is more correct, but CFA will accept either method.
R I remember this being an issue last year too here on the forum. it won’t matter which one you use
CFAI explicitly states it accepts both methods. Check the old AM exam answers.
You are safer using the compounding formula when pre inflation return is high as this results in significant difference between the two methods.
When doing an individual IPS question it is perfectly acceptable to simply add. Multiply for foundations- they have longer time horizons.
i think it depends if the return is for 1 year or multiple years…a lot of questions ask for the return in year 1, in which case you can add the rates. If you are looking at multiple years, it is more appropriate to use the geometric return.