HKSI Paper 12 Client objectives and the products available question: Using the multiplicative method

HKSI Paper 12Client objectives and the products available

Mr and Mrs Leung have a HK$8,000,000 portfolio and need to withdraw HK$320,000 at the end of each year. They also want the portfolio to keep its real value, with inflation expected at 2.5% a year. Using the multiplicative method, what nominal return do they require?

A 6.60%
B 1.46%
C 6.50%
D 4.00%

Show the answer and explanation

Answer: A. 6.60%

The spending need is HK$320,000 / HK$8,000,000 = 4.00% of the portfolio a year. To keep the portfolio's real value as well, the return must also cover inflation. Multiplicative (compounded) method: (1 + 0.04) x (1 + 0.025) - 1 = 1.066 - 1 = 6.60%. Simply adding 4% and 2.5% gives 6.50%, the additive approximation, which the question does not ask for. 4.00% covers the withdrawals only and lets inflation erode the capital. 1.46% divides by inflation instead of multiplying: 1.04 / 1.025 - 1. Source: Standard return objective calculation (required return = spending rate compounded with inflation) (as at October 2026).

Common mistake

Adding the spending rate and inflation when the question asks for the compounded figure, or forgetting inflation altogether.

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Related HKSI Paper 12 questions

Mrs Kwok's IPS was agreed two years ago while she was working. She has now retired early after an illness and will draw on her portfolio for living costs. What should her manager do?Kelvin, 27, has just started his first job. He has no dependants, small savings and expects his income to rise steadily. Which life-cycle stage is he in, and what does it usually imply?Mr and Mrs Fung, both 55, plan to retire at 65 and then live off their portfolio for about 25 years. How is their time horizon BEST described?

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Original study material mapped to the public HKSI Paper 12 syllabus. Unofficial, not endorsed by HKSI Institute or the SFC. Verify figures and rules against current guidance before relying on them.