After-Tax Performance Measurement

Abstract

Measuring portfolio performance on an after-tax basis is a challenging matter. Whether one uses simple or complex models, one implicitly or explicitly makes certain assumptions about a taxable investor's time horizon and capital gains recognition behavior. This article integrates the after-tax performance measurement literature with recent advances in after-tax portfolio valuation. It implements a variation of Stein's [1998] full cost equivalent model using after-tax valuation techniques developed by Horan [2007a, b]. The approach has several advantages. It can be applied relatively easily without sacrificing precision; it accounts for the impact of taxes on portfolio risk; and it can be used to develop a customized after-tax benchmark.