Why can't I get the IPS return calculation correct?!

I’ve done the CFAI past exams (through 2006) and I always seem to miss something in the return calculation. Is anyone else having difficulty with this? If not, is there a methodology or template that can help with this question? Any help/advice would be greatly appreciated.

Agreed. I don’t remember getting it correct even once

its very difficult to get it right on. if is very easy to forget one little thing throuwing off the whole calculation. they will be generous on part marks i assume though.

Yeah, I’m having problems myself - and previous discussions here have kind of indicated that CFAI isn’t entirely clear. Just keep inflation, taxes and WHEN the cash flows happen in mind. That is key.

nice, i thought i was the only one! guess you should detail out the process so you can get partical credit.

These are tricky, and there’s no guaranteed way to get them right, but I’ve found that drawing timelines for the inflows and outflows of cash flows (similar to an old FRA or swap calc) really helps me out. Also ensures that the grader will give out max partial credit, I’d think. Also, practice, practice, practice…good luck.

^^ follow the useful advices from Skillionaire. Maybe re-do these IPS following his steps. Also look at each your old answers and look for what you often missed. Remember many of us have the same problems with IPS.

The 2007 exam made me throw up my hands. 3m ending value and using the TVM calculation to get the rate. F these little oddities. What tricks will they have this year? I feel like I’ve screwed up at every possible point, so what will be the new wrinkle I miss?

It will take at least 10 IPS until you get the idea, but there’s no guarantee you will get the answer correct but there’s plently of room for picking up a lot of partial credit.

Also, I think the Schweser scoring convention is pretty strict. Schweser says “Score 2 points for correct cash flow in Year 1, 2 points for correct EOP assets in Year 2, etc.”… so if you missed one item that screws up calculations in multiple time periods, you lose tons of points. As a good example, look at the Schweser 2010 Mock Exam, Question #1. I would think - if you show your work to the graders and miss one calculation along the way, so your numbers don’t tie but you’re 95% of the way there - then they wouldn’t dock you that many points.

I was having this problem to until I employed a method similar to Skill’s. I’ve also noticed that CFA has both a written and quantitative response to the questions, so I started doing the same. In the quant section, I have to write the inflows and out flows so I make sure that (1) I account for everything and (2) I make the proper adjustments for inflation or taxes where necessary. A few rules to remember: 1. Align the cash flows in the correct year(s). 2. Make the appropriate adjustments for inflation. 3. Don’t include the house in the assets unless the question explicitly states it. 4. Don’t gross up, stay consistent with your tax status. If you calculate annual after tax expenses as the required rate, state that the required rate is net of tax (don’t gross up). If you are given pre-tax expense rate, calculate a pretax required rate. Stay consistent with what is given. 5. After doing 1-4 calculate the expenses, the asset base, and the Req. return.

I really struggle with lining the cash flows up. Do they typically take out the first years living expenses right away from investable assets? I never remember to do this and it always haunts me.

Can I join the club? I ALWAYS miss at least one step while trying to calculate the required rate of return… always!

Scenario: Compute BEFORE TAX Return objective for 1st year of retirement, starting in 1 year from Today. In order to determine the portfolio base at the end of this year/start of next year, we would still have to deduct after-tax expenses. Then Return would be: {After tax Expenses/Portfolio Value at Start of year} / (1-T), then include inflation. Does this make sense?

I probably don’t mind chairing this ‘Didn’t get a single return calculation correct’ committee. But it hardly bothers me now, as I have too much to worry about and focus on rest of the stuff.

I was told that they will accept different answers as long as it makes sense. It might be the case for the IPS calculations as long as you state your assumptions.