So after finishing the books a few weeks ago and then having a “wtf did i just spend the last 3 months reading I remember nothing” moment… i began my second pass. A few questions while reviewing IPS: 1.)It is well established that you should have 3 months after tax salary set aside, however it seems like most of the return calculations do not deduct this out of the investable asset base. They do mention it in the liquidity section though. So how are we to know when to remove it or not? 2.)For IPS construction on the returns portion, how are we suppose to know when they want a number or when they just want the conceptuals unless they specify. For example question 11 in the CFA book (IPS section) doesn’t give a return number in the answer, just a process. It would be difficult anyhow given the transient expenses for college, how would you account for that if it wanted an actual return? Capitalize it over the 5 year term and deduct from the investable asset base? Hard to tell. 3.) Question 12 says Liquidity is being met in the IPS construction question, but it clearly is not. Expenses are 150, pension income is 65, and income from the “gift portfolio” is 40, so there is a 45 shortfall, this an error? In the actual return calculation later they get it right, but for purposes of describing the liquidity section i feel like they fkd up.
You must be talking about Reading 14, I have same questions mentioned by you. I have another question : In solution to Q11.B. : How to judge the “Sharpe Ratio” (best or lower) without giving us a risk-free rate ?
Yes it was reading 14. I don’t think Q11.B mentions the sharpe ratio, it does reference higher return per unit of risk, which is still a valid criteria, it’s just not “excess” return. In any event although you won’t know the exact number for the sharpe ratio, you can pretty well determine which one would be higher since the rf rate would be the same for every calculation…
Good questions…both…there is probably no right answer for the “numbers vs. process” questions…I guess that if you see plenty of data…do the numbers…if data seems to be insufficient…focus on the process (and do what ever number you can…just to be safe). Regarding question12.A (liquidity)…I think this is an error…just like you mentioned they will get $65K plus $40…not enough to cover $150 (unless they mean $65 X 2…but I highly doubt it).
Ok…well it is clear by answer C.ii that there is a liquidity requirement of $45K
1 - Apparently the savings of 3 months salary or so is not subtracted from the investable assets. Only the PV of a future cash outflow (like a college pmt of 40,000 in one year from now) is subtracted from the investable assets. 2 - If the CFAI wants you to come up with a number, it will ask “Show your calculations” on the question or “No calculations necessary” if they just want a qualitative answer. 3 - I don’t have the book with me. But this is why the morning section scares me. So many question marks and the CFAI textbook seems contradictory at times.