CFA Level I · CFA Level I Exam · Basics of Portfolio Planning and Construction
A foundation's IPS states that it must pay out 5% of assets each year to grantees and that the board wants the real value of the endowment preserved. Inflation is expected to be 2.5% and annual management costs are 0.5%. The nominal return the foundation most likely needs to meet its objective is closest to:
The required nominal return is about 8.0%. It is the 5.0% payout plus 2.5% inflation to preserve real value plus 0.5% management costs. Leaving out inflation and costs gives 5.0%, which would erode the endowment's real value over time.
- A5.0%
- B8.0%Correct
- C10.5%
Explanation
Required return is approximately payout 5.0% plus inflation 2.5% plus costs 0.5% = 8.0%. 5.0% omits inflation and costs; 10.5% double counts items.
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