CFA Level I · CFA Level I Exam · Basics of Portfolio Planning and Construction
A foundation's IPS states that it must distribute 5% of assets annually and expects inflation of 2.5% and annual expenses of 0.5%. Ignoring taxes, the return needed to preserve the real value of capital is closest to:
The required return is about 8.0%. Add the 5.0% annual distribution, 2.5% expected inflation and 0.5% expenses to preserve the real value of capital. Choosing 5.0% omits inflation and costs, while 10.0% overstates the requirement.
- A5.0%
- B8.0%Correct
- C10.0%
Explanation
Required return = spending 5.0% + inflation 2.5% + expenses 0.5% = 8.0% (simple additive approximation). 5.0% ignores inflation and costs, and 10.0% double counts items.
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