i did a past exam (2001) and got confused. liquidity constraint - will just include what you need over and above your spending levels (in case of endowments) and anything above your normal living expenses (in individuals) bec that ans included what the endowmwnt needed to spend in an year as liq ! … but if you do follow that reasoning your entire return reqt becomes your liq constraint… thats just silly. so liq will only be - any special expense, or some big purchase in the near future or a cash reserve… right???
I was going to ask a similar question - The 2006 Exam for Serra lists his Liquidity Requirements (Personal IPS) as being special one time as well as bulleting off his needs (living expenses, CHild Support) even though those are covered under the return requirement calc. For the test, Im throwing in everything that is a cash outflow…
i thought it was anything that needs to be paid out of investment income. i.e. if expenses are > than salary.
yes, if anything needs to be payed out - goes to liquidity, so it is expenses + any < 1 year payouts
but thats just wrong. say, ur an endowment with a spending level of 6.5%… that would mean ur liq will need to be 6.5% or if u r an individual with a 7% reqt and no income. ur risk tolerance will go down but liq is not eual to 7% … bec we follow a total return approach… the req should be met out of both div/int and sale of securities
if it was an endowment you do have to say you need to meet the spending requirement in the liquidity section.