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Abstract
Taxes introduce certain complexities, requiring proper adjustments to return and risk parameters. The author offers a refined set of after-tax return and risk equations for use in practice and validates them with a stochastic future value cash flow model. The refined after-tax return and risk parameters can be used in portfolio optimization, Monte Carlo simulation, and deterministic present/future value portfolio modeling with internally consistent results. The refinements improve the discovery of the optimal after-tax portfolio and enhance long-term wealth planning in the presence of risk.
TOPIC: Wealth management
Key Findings
• After-tax return and risk parameters are necessary for efficient asset allocation and accurate wealth planning.
• Parameters must incorporate tax complexity while producing internally consistent results across portfolio optimization, Monte Carlo simulation, and deterministic modeling.
• Refinements include the arithmetic-geometric return treatment with tax, a more precise incorporation of the effective annual capital gains tax rate, and risk manifesting in the price return across the distribution.
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US and Overseas: +1 646-931-9045
UK: 0207 139 1600