CFA CFA Level 3 Estate Planning – pg 152 Answer 2B in Solutions

Estate Planning – pg 152 Answer 2B in Solutions

  • This topic has 2 replies, 2 voices, and was last updated Apr-18 by adossa3.
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    • adossa3
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      Hi there,
      trouble with below answer:

      ‘It is not appropriate to use the expected return of the assets used to fund spending needs to calculate the capitalized value of their core capital needs, because the risk of the Pearsalls’ spending needs is unrelated to the risk of the investment portfolio used to fund those needs. (understood) Although the annual spending cash flows are not riskless, a risk-free rate should be used to calculate the present value of the cash flows as their uncertainty is unrelated to market risk factors that would be priced in a normal asset pricing model, making their beta equal to zero. (didnt understand this sentence)’

      Thanks very much.

    • daharmattan1
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      The Beta = zero because it is a risk free asset. I think you can safely ignore the “although the annual spending cash flows are not riskless” part of the statement and then it becomes fairly clear.

    • adossa3
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      Thanks very much !

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