Firstly, this IPS is inconsistent wit past exams with how the initial return requirement is calculated–first inflation added and then grossed up for tax (I know that’s already been discussed). But besides that, I think the return requirement is calculated wrong on page 195 Volume 2.

They say that if the Reston Stock falls by 50%, the MV of the stock is $3,250,000. Then they say when you add that to the savings portfolio, you get a total portfolio value of $5,250,000. But we need to use the portfolio value at age 65, not 58. They use $658,000 in the numerator, which is how much expenses she needs at age 65.

What they did: $658,000 / ($3,250,000 + $2,000,000) = 12.5%

What I think should be done: $658,000 / ($3,250,000 + *$3,211,562.96) = 10.18%

* $2,000,000 x 1.07^7 = $3,211,562.96

This approach would be consistent with how they calculated the required return on the top of page 194 (expenses at age 65 divided by asset base at age 65). You may be able to make the argument that they mean to calculate the required return at age 58, but then you can’t use $658,000 in the numerator.