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Calculate the total required rate of return - in nominal terms – for the investment.  Calculate the total required rate of return - in real terms – for the investment.

Calculate the total required rate of return - in nominal terms – for the investment.  Calculate the total required rate of return - in real terms – for the investment.

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Calculate the total required rate of return - in nominal terms – for the investment. 

Calculate the total required rate of return - in real terms – for the investment.

Terry White is creating an asset allocation for an institutional portfolio with a plan to fund the entire operation of the institute from the returns of the investment. The institution's board of directors (BoD) wish to invest $50m in a portfolio of assets from the developed market to generate $3m per annum for the operating budget. The operating budget amount will increase each year with the rate of inflation. The BoD want to preserve the capital in real terms at the very minimum, but wish to grow their investment, in real terms, by 0.5% per annum. The investor is confident to be able to inject $1 million each year through donations. The amount of capital added will also increase with the rate of inflation. The investor expects inflation to remain at 2% for the foreseeable future. The portfolio managers will charge a fee of 1% of the asset market value.
Transcribed Image Text:Terry White is creating an asset allocation for an institutional portfolio with a plan to fund the entire operation of the institute from the returns of the investment. The institution's board of directors (BoD) wish to invest $50m in a portfolio of assets from the developed market to generate $3m per annum for the operating budget. The operating budget amount will increase each year with the rate of inflation. The BoD want to preserve the capital in real terms at the very minimum, but wish to grow their investment, in real terms, by 0.5% per annum. The investor is confident to be able to inject $1 million each year through donations. The amount of capital added will also increase with the rate of inflation. The investor expects inflation to remain at 2% for the foreseeable future. The portfolio managers will charge a fee of 1% of the asset market value.
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