To clarify: if return calc involves TVM, is this always considered net nominal?

[system]

@Alladin

guys, you are torturing my little little brain!

i have a few questions non the less!!

[1] According to your post daveyc18, the decision to include inflation in the return requirement (+inflation) depends on whether we are looking at a ‘Grow asset base of X to Y’ or a ‘Traditional’ question type?

[2]Also daveyc18,you said that the reason for not including inflation in the maclin case is due to income/expenses increasing at the rate of inflation…but in the case it merely says that ‘after tax salary increases will offset any future increases in expenses’ which are two different statements no?

for example : in the inger case,both income/expenses increase at inflation rate (we adjust CFs @ (1+infl)) AND we want to preserve purchasing power (we add inflation in return req).

…so if your statement about ‘‘both income/expenses increasing at inflation would eliminate the need for adding inflation to ret req’’ were true, the inger example would be wrong…??

[3] Wouldn’t the inger case be the evidence that adjusting CFs for inflation and adding inflation to return requirement are seperate issues?

if [a]only expenses or [b] both expenses/income increase at inflation, we would adjust CFs by (1+inf). If in addition we want to preserve the real value of the portfolio, we also add inflation to the end (ret requirement section).

help !

" ‘after tax salary increases will offset any future increases in expenses’"

Salary would only offset increases in expenses due to inflation. A company wouldnt pay you more just because you decided to live more lavishly.

____

If you want to GROW he portfolio, but inflation isn’t a factor, then the return you calculate via TVM is all that’s needed to grow the portfolio to the target value. Any extra return for inflation is NOT needed cuz the portfolio doesn’t need to fight it off.

If you simply want to MAINTAIN the value of the portfolio, the portfolio must fight off inflation; otherwise, it would decrease in value. This is where NY is correct.

[the_show_NY]

so in 2007 case, what is the inflation adjustment at the end added on for? maintaining the real value of the portfolio or covering the inflation portion of expenses (since there is no offsetting salary)?

i cant be both.

[Alladin]

i think the post hereby rahuls is still the clearest to me

http://www.analystforum.com/forums/cfa-forums/cfa-level-iii-forum/91309870

[the_show_NY]

thanks for this link. i replied in that post. so lets see what peoples thuoghts are.

[system]

@the_show_NY

so in 2007 case, what is the inflation adjustment at the end added on for? maintaining the real value of the portfolio or covering the inflation portion of expenses (since there is no offsetting salary)?

i cant be both.

In 2007, you see expenses are increasing at the rate of inflation, so the portfolio must grow at a rate + at the rate of inflation to reach the terminal value.

[system]

ill summarize it like this:

1. simply want to maintain value, add inflation (2008, first part)

2. want the portfolio to GROW at a certain value, add inflation if there are outflows that increase the rate of inflation (2007) …

3. want the portfolio to GROW at a certain value, DON’T add inflation if outlfows are FIXED (2008 exam, fixed mortgage payments)

OR if cash inflows and outflows both grow at the rate of inflation, cancelling inflation out (EOC #13)

[markCFAIL]

@daveyc18

ill summarize it like this:

1. simply want to maintain value, add inflation (2008, first part)

2. want the portfolio to GROW at a certain value, add inflation if there are outflows that increase the rate of inflation …if there are inflows but they’re fixed, still add inflation (EOC #12)

3. want the portfolio to GROW at a certain value, DON’T add inflation if outlfows are FIXED (2008 exam, fixed mortgage payments)

OR if cash inflows and outflows both grow at the rate of inflation, cancelling inflation out (EOC #13)

I think this is fair, however the implicatoin in case 2 and 3 is that the portion of the portfolio not related to meeting expenses will be eroded in real terms. I guess this is ok because they only target a nominal value and don’t state in THAT part of the question they want to preserve real purch power… however earlier on in the question they do state so, so it is a bit confusing. I guess you need to literally assume it is an entirely new objective.