CFA CFA Level 2 Real Growth Rate?

Real Growth Rate?

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    • vincentt
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      I’ve been given

      Domestic inflation rate = 8.738%
      Nominal growth rate = 12%

      and to get the real growth rate the calculation was (1.12 / 1.08738) – 1 = 3%

      Could someone explain why was it divided by inflation to get the real growth rate?

      I thought Nominal rate = real rate + inflation rate?

      so shouldn’t it be 12 – 8.738 = 3.262% ?

    • lulu123
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      the calculation done was using the more precise way (Fisher formula, correct me if I’m wrong)

      http://en.wikipedia.org/wiki/Fisher_equation

      basically it goes:
      1+nominal = (1+real)(1+inflation) -> rearrange and you get what the calculation did

      the nominal = real + inflation is a simplified way, and as you see, the answer is very close (0.23% off)

    • vincentt
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      thanks @lulu123 ! hmm.. that’s actually used in one of the question for equity. So the question is should we always stick to 1 + nom = (1+real) (1 + inflation)? And as far as i could remember fisher’s equation is only in economics and not equity?

    • Sophie Macon
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      I’m not sure if we can segregate them by chapters like that @vincentt. Economics is the backbone of most finance questions 🙂 Now that you know there are 2 methods (basically the first is an approximate of Fischer), I don’t think the question has the intention to catch you out like that on that. So stick to Fischer to start, unless you can’t find the answer or the questions states so (i.e. not to use Fischer, which is rare).

    • vincentt
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      that freaks me out for a bit when I saw the method they used to calculate the rate.

      thanks @lulu123 and @sophie

    • Sophie Macon
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      Hehe, by the end of this month you’d be immune to freaking out, as you’ll get used to it 😉

    • Zee Tan
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      And @diya exercises her Sr Portfolio Manager powers!

    • Sophie Macon
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      And @diya exercises her Sr Portfolio Manager powers!

      @diya, like a boss 😉

    • vincentt
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      @sophie if given the choice of picking either, would you suggest that I do CFAI EOC Q or practice Q (CFAI mock and schweser’s practice exam) ?

    • Sophie Macon
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      @vincentt – if I had to pick. Definitely the latter, it’s as real and close to the real thing. Timed, preferably. What are your plans in this last month?

    • vincentt
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      @sophie started doing the first practice exam (schweser’s), but wanted to try and complete some CFAI’s EOC. Gonna be tough to fit both in as practice exams do take up quite a big chuck of time especially the reviewing part.

    • Sophie Macon
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      Yea they do. No worries @vincentt. That’s what this 1 month is for. Focus on the review, spot your weak areas, and target those specific CFAI EOC questions in that area.

    • vincentt
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      @sophie in fact that might be a better plan! Btw, is it normal to take way longer than it should to complete the first practice exam?

    • Sophie Macon
      Keymaster
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      Yup. Totally normal @vincentt. But the goal is always to time it and stop when 3 hours is up. Feel terrible later cos you manage your time properly. But of course attempt the remaining questions and time it to make sure it’s within that X min per question.

      You will gradually learn that if you can’t solve it within X seconds, circle the question, choose a random answer (for now), keep to your time per question, move on, come back to it once you have time. It’s one of the ways where you have maximum coverage and attempt everything and keep to your time limit. Shoot and go 🙂

    • Sarah
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      Shoot and go 🙂

      Ask questions later.
      :))

    • Sophie Macon
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      Wise words, eh? :))

    • padniaki
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      Yeah, definitely a case of approximation vs. exact. I would know both formulas just in case, but you’ll be able to get away with the approximation if the answers are very different (e.g., 2%, 4%, 7%, rather than 3.1%, 3.45%, 3.2%)

    • Sophie Macon
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      Yup that’s a good strategy too @padniaki – a process of elimination to narrow down the possible answer. Anyways, what do you do @padniaki and why did you join us so late?! 🙂

    • padniaki
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      @sophie I was just about to post that in the other thread: i work as a personal banker at a local retail branch of a major bank. It’s a customer service job, really…has nothing to do with investing. I graduated with a finance degree in 2009….needless to say, the job prospects weren’t so good when I graduated, haha.

      Anyway, I love investing/finance/capital markets, and have know this is what I want to be doing for some time now. I started taking the CFA in order to learn more and improve my job prospects. I passed L1 and L2 on the first try each, and I’ve got one more to go. Still looking for something (ANYTHING) in finance…planning to start looking more actively again after the exam is done.

      My tendency is to post more as the exam gets closer, but I’m not sure why that is…maybe looking at/answering other people’s questions helps me solidify my understanding.

    • Sophie Macon
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      Ah sorry I made you digress then @padniaki! Indeed we should strive to not go off-topic 😛 Good to hear that you’re pursuing your goals, I mean the crisis sucks, but hey, luckily this happened right at the beginning, not at the middle in your career when you have more obligations like mortgage/family etc – look on the bright side, many of us are in the same boat here!

      That’s great. Seems like you’re well prepared and yes, I agree that answering or looking at answers here do help loads. They are great (but different) way of revising. 🙂

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