PT  - JOURNAL ARTICLE
AU  - Mladina, Peter
TI  - Refining After-Tax Return and Risk Parameters
AID  - 10.3905/jwm.2020.1.112
DP  - 2020 May 23
TA  - The Journal of Wealth Management
PG  - jwm.2020.1.112
4099  - http://jwm.pm-research.com/content/early/2020/05/23/jwm.2020.1.112.short
4100  - http://jwm.pm-research.com/content/early/2020/05/23/jwm.2020.1.112.full
AB  - 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 managementKey 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.