RT Journal Article
SR Electronic
T1 Tax-Adjusted Portfolio Optimization and Asset Location: <em>Extensions and Synthesis</em>
JF The Journal of Wealth Management
FD Institutional Investor Journals
SP 56
OP 73
DO 10.3905/jwm.2008.11.3.056
VO 11
IS 3
A1 Stephen M. Horan
A1 Ashraf Al Zaman
YR 2008
UL https://pm-research.com/content/11/3/56.abstract
AB Models developed in a pretax framework do not necessarily apply in an after-tax framework, and this notion certainly applies to portfolio optimization. This article derives generalized tax adjustments to return and volatility inputs in an after-tax portfolio optimization algorithm. It extends the literature by incorporating an asset’s cost basis, addressing a broader array of taxable entities, and deriving expressions for off-diagonal terms in the covariance matrix. They develop a comprehensive framework that distinguishes between tax-adjustments predicated on pretax market values and after-tax values. The distinction is important so that portfolio managers can avoid inadvertently blending two inconsistent approaches.TOPICS: Portfolio construction, legal/regulatory/public policy, performance measurement